The purpose of filing Chapter 7 bankruptcy is to pay off debt, which permanently protects the filer from collection activities by creditors. But sometimes the debtor may not want to pay off certain debts. I’m not referring to credit cards that offer frequent flyer miles or bills from favorite doctors. All unsecured debt, with the exception of student loans, are waived in Chapter 7 bankruptcy cases, even if the debtor wishes to exclude the creditor from the process. However, secured loans such as mortgages and auto loans can be exempt from the effect of a discharge order through a document called a reinstatement agreement.
Reaffirmation means that the debtor relinquishes the right to repay the debt. In return for reconfirming the loan, the debtor gets collateral. The reaffirmation agreement must be signed by the debtor and creditor. They are completely voluntary and the debtor cannot force the creditor to sign a reaffirmation agreement. If the creditor refuses to sign, in most cases they will not take steps to take back the vehicle or foreclose the house if the debtor had to make payments under the original contract. There are other requirements such as paying property taxes so that the lender’s liens are not subordinated and maintaining insurance so that the property is adequately protected.
The reinstatement agreement must be approved by the court. Each agreement is submitted to the bankruptcy court for review before binding the parties. The court considers the agreement and determines whether the debtor is able to pay the payments based on the proposed income and budget on schedule. In most cases, courts will not allow debtors to reassert debts that they clearly cannot afford based on the information in the schedule. If the court rejects the reinstatement agreement the debt is released, but the debtor can usually keep the property by withholding to make payments under the original contract.