The Law Office of Kurt H King

January 10, 2011

Reaffirmation Agreements in Missouri Chapter 7 Bankruptcy Cases

Filed under: Bankruptcy,Uncategorized — kurthking @ 6:07 pm
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Many times a debtor wants to keep a car or house, for example, in a Chapter 7 bankruptcy case here in Missouri. And, creditors nearly always would rather have the debtor keep the vehicle and continue to make the payments on the loan from that creditor secured by a lien on the vehicle or house. Consequently, Chapter 7 bankruptcy law gives the debtor the options of (1) surrendering the vehicle/home/other asset to the creditor, (2) entering into a reaffirmation agreement, or (3) the rarely exercised option of redeeming which requires a single large payment to the creditor to retire the debt forever.

In a reaffirmation agreement, both debtor and creditor/lender agree in writing in a certain form that the court requires that the debtor keep the asset and make the payments to the lender despite the bankruptcy.

The agreement must be one that the debtor can afford. This is very important because the debtor cannor refile Chapter 7 for 8 years. If during that 8 years the debtor fails to make the payments on the loan or otherwise defaults on the loan, then the debtor is likely to be sued and may well suffer garnishment of wages and execution on bank account assets by the lender to obtain repayment of the balance of the loan that the debtor reaffirmed. DO NOT REAFFIRM UNLESS YOU ARE REASONABLY CERTAIN THAT YOU CAN PAY OFF THE FULL LOAN ON THE REAFFIRMED DEBT.

A side note on this topic is that some home lenders have refused to join in reaffirmation agreements. Rather, such a lender simply lets the debtor of the Chapter 7 bankruptcy case stay in the residence as long as debtor making the loan payment to pay off the loan in full per its original terms. If the debtor so pays off the loan over the years, then: the creditor gets its money, releases the lien, shows the loan satisfied in full; the debtor owns the home free of the lien of the loan; and, all are happy.

But what if a few months or years after the Chapter 7 bankruptcy case closes, the debtor/home owner fails to make the loan payments and the loan hits default status leading to foreclosure sale?

With a foreclosure sale, the debtors look pretty certain to lose the house.

The sticky issue is whether the debtor/home owner will also be personally liable for any deficiency–that is the balance of the loan that remains due even after the sale of the property for less than the full amount due on the loan and foeclosure expenses. The debtor/home owner may claim that the debt/home loan was not reaffirmed in the Chapter 7 bankruptcy and thus discharged, which would mean no personal liability on a deficiency judgment. But will the creditor and the court agree? And, can the debtor/home owner afford to hire an attorney to protect his position in court so the judge makes the right decision? Unfortunately, debtors that want to reaffirm and keep the house will have to go this route to keep the home when the practice of the home loan lender is not to enter into written reaffirmation agreements filed with and approved by the bankruptcy court.

Note that the bankruptcy court does not now make creditors provide or enter into reaffirmation agreements in Missouri Chapter 7 cases.

Kurt H. King
Law Office of Kurt H. King
20 E. Franklin
Liberty, Clay County, Missouri 64068

Bankruptcy, Child Custody and Support, Divorce and Modification, Family Law
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