What To Do When The Court Denies Your Reaffirmation Agreement

Law Blog

Approximately 794,960 people filed for bankruptcy in 2016. If you're one of those people and want to prevent a dischargeable debt from being wiped out by your bankruptcy, you can renew your commitment to paying it by signing a reaffirmation agreement with the creditor. Just because you can protect a debt from discharge, however, doesn't mean the court will go along with the scheme. Here are a few reasons why the bankruptcy judge may reject the agreement and your options if that happens.

Reasons the Agreement May Be Denied

The bankruptcy court's goal is to ensure creditors are paid as much as they can be from the petitioner's bankruptcy estate and to protect the petitioner from problematic issues that could land him or her into dire financial straits again. This is why any affirmation agreement between a petitioner and creditor must be approved by the judge overseeing the petitioner's case.

While most affirmation agreements are approved by the court, here are a few reasons why the judge may reject one:

1. The value of the collateral is less than what's owed (e.g., a car is only worth $5,000 but the amount you owe on the bank note is $10,000)
2. You can't afford the payments (e.g., your leftover debt from bankruptcy makes it unlikely you'll be able to keep the account current)
3. The debt is not secured. This issue frequently comes into play when people try to reaffirm credit card debt. However, your reaffirmation agreement may also be rejected if the debt is no longer covered by collateral that once secured it—for instance, a second mortgage on an underwater home.
4. The terms are significantly unfavorable to you (e.g., high interest rate)

In general, the judge will determine whether reaffirming the debt is in your best interest. If there it appears the agreement will have a significantly negative impact or is unfair to you in some way, he or she will reject the contract.

Possible Solutions

Having your reaffirmation agreement rejected by the court isn't the end of the world, though it may feel that way. There are a few ways you can handle this situation. The first option would be to negotiate a better deal with the creditor.

For example, if the judge didn't accept your reaffirmation agreement because the interest rate the creditor was charging was obnoxiously high, you could negotiate a lower rate that's acceptable to the court. Since the creditor wants the reaffirmation agreement to be approved—because it legally obligates you to continue paying the debt—it may be motivated to make the required changes.

The other option is to take the time available to you to get caught up on back payments and then continue repaying the debt as agreed. Technically, a creditor can repossess collateral (e.g., a car or home) during or after the bankruptcy procedure if the court doesn't approve the reaffirmation agreement. However, as noted previously, the creditor would rather have the money than the property and will likely let you keep it if you get caught up and stay on top of your payments.

The benefit to taking this route is that bankruptcy ends your legal obligation to the creditor. So if keeping up the payments becomes onerous to you, you can let the creditor repossess the property without any legal consequences. 

If the agreement was rejected because the court thinks you can't afford the payments, you'll need to show how your finances will change enough so that you can. For example, showing you will get a second job in the near future might change the judge's mind. Be aware, though, that your chances at successfully getting a bankruptcy discharge may be jeopardized if you go this route because it could affect your ability to pass the means test. Be sure to talk to an attorney before taking this option.

For more information about reaffirmation agreements or other matters related to filing bankruptcy, contact a bankruptcy attorney.

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14 November 2017