Reaffirmation Agreement

There are features of Chapter 7 bankruptcy and Chapter 13 bankruptcy that are similar and some that are quite different. A significant similarity is the automatic stay under Section 362 of the United States Bankruptcy Code, or Code, wherein a bankruptcy filing stays, or stops, creditors from taking collection action against the debtor. When this occurs, a bankruptcy court oversees debt repayment and a bankruptcy trustee administers those payments.

A significant difference is how the debts are repaid. Chapter 7, also known as “straight” bankruptcy, is when a trustee “places” the debtor’s property into a bankruptcy estate and sells items. Certain items may be excluded or exempted while other items are for sale. For instance, O.J. Simpson sold a super bowl ring through the course of a bankruptcy. Whereas Chapter 13 bankruptcy, also known as the “wage earner’s” bankruptcy, is when the debtor, through the approval of the bankruptcy court, creates a plan to repay creditors. (Unlike Chapter 7, a debtor must be earning income to qualify for Chapter 13.) The debtor creates a budget and submits it to a bankruptcy judge for approval. Anything earned above the budget is used to repay creditors. After three or five years (usually five) of paying off debt under the plan the debtor receives a discharge.

In general, Chapter 13 is more advantageous because it allows the debtor to keep his or her house or car, which are items the debtor may have worked very hard to attain. In contrast, during a Chapter 7 bankruptcy, a trustee may be able to compel the debtor to sell those items.

Consider a debtor who does not qualify for a Chapter 13 bankruptcy. Perhaps the debtor is not earning income or had debt that are beyond the limits of a Chapter 13. This results in the debtor filing for Chapter 7. Yet the debtor may want to keep his or her car or house or boat. How would a debtor keep such items when he or she is undergoing a bankruptcy?

Reaffirmation Agreement

To keep these items, a debtor would want to enter into a reaffirmation agreement with the creditors. That is to say, the debtor files a form with the bankruptcy court that he or she requests approval of an agreement with one or a number of creditors to keep certain items. Under this agreement, the debtor retains ownership of the property despite the bankruptcy in return for the debtor obligating him- or her- self to repay creditors for that item. As mentioned, upon a bankruptcy filing, the relationship between the debtor and the creditors fall under the domain of a bankruptcy court. As such, the bankruptcy court must place its stamp of approval upon the reaffirmation agreement for the agreement to be effective.

Facing mounting debt? Have high credit card bills? Bankruptcy may be right for you. Contact the Bay-area debt relief law firm of Melanie Tavare, a knowledgeable and experienced debt relief attorney.