Should I Sign a Reaffirmation Agreement?

February 11, 2016 | Category: Chapter 7, Mortgages

Occasionally, when a client meets with me, they say that they really want to pay their debt. Frequently, my response is: "Well, you can pay your debt when your bankruptcy case is finished; nothing in the Bankruptcy Code prevents that. You can pay all of your creditors in full, you can pay some of your creditors in full, you can pay some of the debt owed to all of your creditors, or you can pay some of the debt owed to some of your creditors.” Usually, the client looks at me funny, cocks their head to the side, and asks: "Why would I do that?" I usually respond by saying: "You won't, but you were the one who said that you really want to pay your debts".

The truth is that most people don't pay back debt that has been discharged in the bankruptcy case; that would defeat the purpose of having to file the bankruptcy in the first place.

There are circumstances, however, when a person would want to, or need to, repay debt that would otherwise be discharged in their bankruptcy case. For instance, sometimes the debtor wants or needs to retain an asset that is collateral for a loan, like a vehicle; or, there may be a cosigner or guarantor on the debtor’s loan who could be sued if the debtor discharges the debt.

A reaffirmation agreement is a written agreement between a person who filed a bankruptcy case (a "debtor”) and lender to whom money is owed (a “creditor”) in order to repay a debt that would otherwise be wiped out or discharged in the bankruptcy case. Reaffirmation agreements are relevant only to cases filed under chapter 7 of the Bankruptcy Code ("straight" bankruptcy cases). By signing the reaffirmation agreement, the debtor is able to retain the collateral for a loan if they continue to pay the debt. If the reaffirmation agreement is signed and filed with the bankruptcy court before the discharge order is entered, the reaffirmed debt is not part of the discharge and the debtor remains liable for the debt after the bankruptcy case is concluded. After the bankruptcy case is concluded, if the debtor fails to pay the creditor on the reaffirmed debt, the creditor can repossess the collateral and sue the debtor for the deficiency balance. Also, after the bankruptcy case is concluded, payments, or failure to make payments, will be reported to the credit bureaus. 

A debtor would not necessarily want to sign a reaffirmation agreement on all debts secured by collateral. Usually, a debtor would want to sign a reaffirmation agreement on personal property, such as a vehicle, because most vehicle lenders will not allow the debtor to retain the vehicle and pay for it without a signed reaffirmation agreement.  However, a debtor would not want to reaffirm a debt just to rebuild credit; there are better ways to accomplish that. A debtor would not want to reaffirm a debt where the lien on the collateral, usually household goods and furnishings, can be avoided (eliminated in the bankruptcy case) or is usually not enforced. A debtor should not reaffirm on a debt where they do not need the collateral, or if they can replace the collateral at a lower cost. A debtor should not reaffirm a debt that they cannot afford, or if they are behind on the payments.

If you have questions or need assistance, call us today to speak with one of our lawyers by phone or in person.