“To Reaffirm or Not to Reaffirm, that is the Question!” Reaffirmation Agreements can be a double-edged sword.

What is a Reaffirmation Agreement?

A reaffirmation agreement in a Bankruptcy is a legally enforceable agreement to repay all or a portion of a debt. In order for the agreement to be valid, the creditor must sign the agreement as well as either your attorney or the Judge. This is a situation where Congress has substituted my judgment for your judgment. I will not sign the reaffirmation agreement unless I believe that reaffirming the debt is in your best interest and that you can afford to repay the debt. Once all parties have signed the agreement it must be filed with the court prior to the deadline issued by the Court.

Reaffirmation Agreements on Home Loans

A creditor that has a debt secured by an interest in real property (e.g., a house) cannot foreclose on the property simply because you chose not to reaffirm the debt. However, the creditor may elect not to send you statements and may choose not to report payments to credit reporting agencies. I discourage my clients from reaffirming on home loans. However, reaffirming a loan secured by your house may make it easier to reestablish your credit, pursue a loan modification, or simply communicate with your bank. Therefore, some clients elect to pursue a reaffirmation agreement on a home loan.

Reaffirmation Agreements on Car Loans

A creditor that has a debt secured by an interest in personal property (e.g., a car) may repossess the property if you have not entered into a reaffirmation agreement or redeemed the property within 30 days of your creditors meeting.  Generally, creditors would rather continue to collect payments than repossess a car, but every creditor is different, and you should discuss the wisdom of reaffirming an automobile loan.  In many instances, it is not a wise decision.

How do I Reaffirm a Loan in Chapter 7 Bankruptcy?

In order for the reaffirmation agreement to be valid in a Chapter 7 Bankruptcy, either your attorney or the judge has to approve it.  If I, as your attorney, am approving the reaffirmation agreement I must sign a declaration that I believe that the agreement does not impose an undue hardship. I will not sign the reaffirmation agreement if your budget does not support the position that you can afford the payments.  The same holds true if the interest rate is unreasonable or if the value of the property is significantly less than the amount owed on the debt.

Once you have gone through this process the creditor cannot repossess the property unless you are in default on your contract.  TO be in default means that you are behind on the payments or don’t have insurance. Debtors who timely offer to enter into reaffirmation agreements and are not in default on the loan may keep their cars.  This can be true even if the bankruptcy court does not approve the reaffirmation agreement.