What is a Reaffirmation Agreement?

Individuals who file for bankruptcy often do so to eliminate (“discharge”) the obligation to pay certain types of debt and to obtain a financial “fresh start.”

Not all debts are dischargeable, but most common consumer debts are. In certain limited circumstances, a debtor may wish to pay a particular debt even though the debt can be discharged in bankruptcy.

Bankruptcy does not prevent a debtor from volunteering to pay a debt that would otherwise be discharged with money that is not for the benefit of creditors as part of the “bankruptcy estate.”

When a debtor agrees to pay such a debt by contract, the debtor must enter into a reaffirmation agreement with a creditor to “reaffirm” the debtor’s intent to pay.

Special considerations come into play when a debtor decides to enter into a reaffirmation agreement because the debtor will be contractually bound to pay the otherwise discharged debt even if, at some point during the life of the agreement, the debtor is unable to make the payments.

Congress was concerned when it passed the Bankruptcy Code that at times debtors had been taken advantage of when they signed these types of agreements. The Bankruptcy Code therefore has certain procedures that apply to protect debtors.

Do I Need to Sign a Reaffirmation Agreement with My Secured Creditor?

A creditor to whom a debtor owes a debt can have a “security interest” in property of the debtor, such as an automobile, home, or appliance, that is being purchased by the debtor over time through periodic payments.

A security interest protects the creditor if the debtor cannot repay the debt and may give the creditor the right to take away and sell the property if the required payments are not made.

Bankruptcy does not make these security interests in property go away. If the debtor would like to keep the property, he or she may have to enter into a reaffirmation agreement with the creditor that obligates the debtor to continue making the required payments during and after the bankruptcy case.

Before reaffirming the debt, the debtor should fully understand the responsibilities of the co-obligor or guarantor and should review the documents that set forth their obligations.

Does a Debtor Need to Sign a Reaffirmation Agreement on a Mortgage?

The Bankruptcy Code is clear that a debtor must enter into a reaffirmation agreement to retain personal property, such as a vehicle, even if he or she is current on all payments. If, however, the debtor is current on payments on their mortgage loan on real property then he or she may not have to reaffirm the debt to retain the property and for the loan to remain in place. Instead, the debt may just keep making payments to the lender without the debt being reaffirmed.

Is a Co-Signer Responsible for Satisfying the Debt?

Yes. Regardless of whether or not you sign a reaffirmation agreement, the co-signer will still be responsible for the debt if you don’t pay it.

If, however, a debtor is a guarantor of a loan and the borrower (non-debtor) has the property securing it, the guarantor (debtor) should NOT have to reaffirm the debt for the borrower to keep the property, as long as the borrower is current on the payments.

If the debtor does not care whether the property is repossessed from the borrower, then the debtor should not sign the reaffirmation agreement.

Should You Enter Into a Reaffirmation Agreement Just to improve Your Credit?

No!  First of all, not all creditors will report on your credit report even if you reaffirm on the debt. Legally they do not have to so don’t let that be the only reason you reaffirm the debt.

Secondly, if you had a bad deal of a loan, you will get lots of offers for new credit once the case is discharged in about 4 months and that loan will report on your credit.

What are the Effects of Entering into a Reaffirmation Agreement?

When a debtor enters into a reaffirmation agreement, he or she is obligated to pay the reaffirmed debt. The reaffirmed debt is treated as if the debtor never filed for bankruptcy.

As such, reaffirmation can have significant financial consequences and must be entered into carefully. If a debtor reaffirms a car loan and misses a payment in the future, the creditor  can repossess the car and sue the debtor for any deficiency balance owed.

When Can a Reaffirmation Agreement be Entered Into?

A reaffirmation agreement must be entered into before the granting of a discharge and filed with the clerk of the bankruptcy court for it to be valid and binding.

An executed reaffirmation agreement may be filed by any party, including the debtor or a creditor however it is almost always filed by the creditor.

It must be filed within 60 days after the first date set for the first meeting of creditors in the bankruptcy case.

Can a Reaffirmation Agreement be Cancelled?

A reaffirmation agreement can be cancelled by a debtor:

(1) Before the issuance of a discharge in the bankruptcy case or

(2) 60 days from the date the reaffirmation agreement is filed with the bankruptcy court.

After that, you are stuck with whatever you signed up.  Also, don’t contact your attorney on the day it expires because that may not be enough time for your attorney to file the required documents to rescind the agreement.