What Happens When a Reaffirmation Is Denied?

A reaffirmation of debt is simply the debtor’s agreement to pay, even though he could discharge the debt through bankruptcy. In many cases, reaffirmation of a loan is on the family home or automobile. Occasionally, the bankruptcy court or the lender will not reaffirm the loan even if you kept the payments current. In those cases, you must look at the reason why the court or lender refused to reaffirm. It might be in your best interest.

Bankruptcy erases your responsibility for listed debts. If you owe credit card balances, once the court discharges a bankruptcy, you no longer owe that debt. However, reaffirmation means you plan to pay the debt. If you can't keep up with the payment, you still owe it and the creditor can now take you to court, garnish your wages or attach your assets to collect the debt. Denying you reaffirmation may be in your best interest.

If you want to reaffirm your car loan, the court may decide against it or your attorney may advise against it. If your car is worth $10,000 and you still owe $25,000, it simply doesn't make sense. You'd be responsible for the balance due if you totaled your car or the company repossessed it later. Occasionally, income may play an important role in the rejection. If your income doesn't meet your obligations, even after you file bankruptcy, leaving you short when it comes to paying the mortgage, taxes and insurance on a home, the court or lender may deny the reaffirmation. Both of these reasons are for your protection to prevent future financial difficulties.

The passage of the bankruptcy law in 2005 made it more difficult to reaffirm a loan. To reaffirm, you and your attorney must certify that the reaffirmed debt won't create a hardship. If you qualified to file a chapter 7 bankruptcy, it indicates either you passed the means test and have the median income test or your allowable expenses lowered your income enough to allow you to file Chapter 7 bankruptcy. This means additional debt may be a hardship and the court might rule against reaffirmation.

Bankruptcy wipes off your obligation to pay the lender but doesn't remove their right to repossess the real estate or vehicle. Your name remains on the title but so does the lien. If you continue to make timely payments on the insurance, home and taxes, many mortgage lenders don't repossess. However, the same is not true for automobile lenders. Some of the lenders that only make car loans insist on a reaffirmation or they repossess the vehicle. Occasionally, a lender might sell you the car for the value if you pay it in a lump sum. The solution you use depends on the company that loaned you the money and what it wants to do. You must discuss your options with your attorney.