Many of the inquiries our office receives involve the possible need for reaffirmation agreements.  In deciding whether to file bankruptcy a debtor is often faced with the dilemma of what to do with his or her secured debt, which typically consists of automobiles and/or a house.  As recently explained by another member of the National Bankruptcy Forum, property is deemed to be secured when it is used as collateral for a loan.   The lender protects its loan by having a document (e.g., a mortgage) stating that if the loan is not repaid or if it is defaulted upon, the lender can take the collateral to satisfy all or part of the debt (e.g., foreclosure).   The loan which is covered by the collateral is deemed to be a “secured debt.”  When a debtor files his or her petition for bankruptcy, it can essentially do four things: (i) surrender the collateral, (ii) redeem the debt, (iii) reaffirm the debt, or (iv) do nothing and continue to repay the debt.   If the debtor surrenders the property and the secured debt is discharged, the debtor is no longer responsible for the debt, but it no longer enjoys the benefit of property.   If the debtor redeems the property it must pay the value of the collateral and the said collateral will then be deemed.   If the debtor reaffirms the debt, it is essentially entering into an agreement to continue to pay the debt the way it was structured prior to filing bankruptcy.   The final option is continuing to make payments without reaffirming the debt; but this runs the risk of having the Trustee or the bankruptcy judge seize the property as part of the bankruptcy estate.

If the debtor elects to reaffirm a debt, a reaffirmation agreement will need to be negotiated between the debtor and that particular creditor.  Such agreements are governed by 11 USC § 524(c). While some jurisdictions have interpreted this rule as requiring bankruptcy court approval of reaffirmation agreements, this is not necessarily the case in the Eastern District of Michigan.  Local Bankruptcy Rule (“LBR”) 4008-1 pertains to reaffirmation agreements and states:

(a) Reaffirmation with Attorney Certification. If the debtor’s attorney certifies that a reaffirmation agreement does not impose an undue hardship on the debtor, neither a motion nor court action is required. The court will not act on a motion to approve the reaffirmation agreement in these circumstances. This subparagraph applies even if it appears that a presumption of undue hardship may apply.

(b) Reaffirmation without Attorney Certification. If a presumption of undue hardship under § 544(m) applies and the debtor’s attorney has not certified that the agreement does not impose an undue hardship, the debtor shall file a separate motion for approval of the reaffirmation agreement.  The motion shall be accompanied by the papers specified in § 524(k)(1) and F.R.Bankr.P. 4008.  The motion shall be titled and filed in the ECF event, “Motion for Approval of Reaffirmation - Presumption of Undue Hardship Applies.” The court will schedule a hearing with notice to the debtor and the creditor. 

(c) Reaffirmation by a Debtor Not Represented by an Attorney in the Case. If a reaffirmation agreement is filed and the debtor is not represented by an attorney in the bankruptcy case, the debtor must sign a motion for approval of the reaffirmation agreement under § 524(k)(7), attached as Part E. The reaffirmation agreement, including Parts A-E, shall be filed in ECF with the event “Reaffirmation Agreement by Debtor Not Represented by An Attorney.” The court will schedule a hearing with notice to the debtor and the creditor. The creditor may file the motion even though the motion is signed by the debtor.

(d) Reaffirmation by a Debtor Represented by an Attorney Who Did Not Negotiate the agreement. The requirements and procedures of paragraph (c) apply to a reaffirmation agreement by a debtor represented by an attorney who did not negotiate the agreement.

The comment to this rule further states:  “Subparagraph (b) was adopted on an interim basis by Administrative Order 05-7, dated October 12, 2005, following the enactment of BAPCPA 2005, and is unchanged in substance. The balance of the rule clarifies the circumstances in which 11 U.S.C. § 524 requires court involvement in a reaffirmation agreement and establishes attendant procedures.”

The decision to reaffirm a debt is an important one that should be reached only after consultation with a bankruptcy attorney.  Likewise, once it is determined that a debt should be reaffirmed, the attorney should participate in negotiating and drafting of any such agreement.