The courts look to whether or not the debtor has the ability to repay pursuant to the terms of a reaffirmation agreement. As a Winnetka bankruptcy lawyer, I know that the court is going to look to the individual’s income, the individual’s expenses and the amount of the monthly payment on the reaffirmed auto. If the debtor’s expenses exceed their income, then there is going to be a presumption of undue hardship on the debtor. In other words, the court wants to make sure that the debtor has the ability to make the monthly payment on the reaffirmed debt. If the debtor’s budget is showing a loss each month, then the court has the right to set a hearing whereby the debtor would have to come into court after claiming bankruptcy and explain to the judge under what circumstances they feel they have the ability to make this reaffirmed debt payment. If the court is satisfied that the debtor has the ability to repay the debt despite the fact that the budget shows otherwise, then the judge will sign an order which finds no presumption of undue hardship. This is basically the court’s approval of the agreement and from that point forward, if the agreement is not rescinded, it is accepted and it is official.
In rare circumstances, the court will make a finding that the reaffirmation agreement does cause an undue hardship upon the debtor and the court will not agree to accept the agreement. This is up to the judge and can happen in an individual bankruptcy or joint bankruptcy case. However even in those cases, if the debtor continues to make the monthly payment, the lender is more apt to allow that to happen then to cancel the entire arrangement and repossess the vehicle and sell it at a deficiency.
So reaffirmation agreements are very important for individuals who are filing Chapter 7 bankruptcy. Reaffirming a debt is a way to keep that debt free beyond the bankruptcy by continuing to make your monthly payment on those items but you are subjects, in case you fall behind in the future, to being sued for the deficiency. A good bankruptcy attorney is going to make sure that a client makes a knowing decision with regard to reaffirming vehicles.
In some circumstances, I would recommend reaffirming a debt on a mortgage but they are very few and far between. One such example would be if the mortgage company is willing to change the terms of the loan. What I’m talking about here is basically a loan modification whereby if someone was paying 7% interest on the loan and the lender is willing to reduce that 7% down to 4%, it might make sense for the debtor to reaffirm on a mortgage. Even though it’s never really recommended that the debtor sign a reaffirmation agreement on a mortgage because it’s not required under the bankruptcy law, there are those rare circumstances where the numbers change to the point where it makes sense for the debtor to sign. Your bankruptcy lawyer will be able to provide assistance and advice in this area.