I don’t like Reaffirmation Agreements. There, I said it. I wanted to be as concise as I could possibly be. When I sit down to review reaffirmation agreements with my clients, this is the first statement that I normally make. The main reason I don’t like reaffirmation agreements is because the benefit to the client is so small compared to the potential for negative consequences. Keep all of this in mind as you read the following.
What Is A Reaffirmation Agreement?
- A reaffirmation agreement is a written document entered into voluntarily between a debtor in Chapter 7 bankruptcy and a creditor. In the agreement the debtor promises to remain personally liable for all or a portion of the money that s/he owes to the creditor, regardless of the bankruptcy filing.
- By signing a reaffirmation agreement, the debtor agrees to continue to make payments on the loan as though s/he never filed bankruptcy.
- A reaffirmation agreement should only be used for secured debt (e.g. homes, autos, furniture, appliances, etc.). You will never see a reaffirmation agreement for an unsecured loan (e.g. credit cards, medical bills, family members, etc.).
- A reaffirmation agreement must be approved by the court. A judge will consider several criteria when deciding whether to approve or disapprove a reaffirmation agreement. Those criteria include, but are not limited to:
- Does the debtor(s) have a positive cash flow (disposable income) each month after all other regular monthly bills have been made?
- Is the value of the property equivalent to or greater than the balance of the loan? (i.e. If you have a $10,000.00 loan on a $1,200.00 vehicle, the court typically is not going to approve a reaffirmation agreement)
- Will this loan cause undue hardship to the debtor(s) or the debtor’s dependants?
- There are two situations where the court does not have authority to deny a reaffirmation:
- The court does not have the authority to deny a reaffirmation agreement for loans that are secured by real estate.
- The court does not have the authority to deny a reaffirmation agreement no matter what the collateral is, if the loan is through a Credit Union.
- Typically it is the creditor who prepares and files the reaffirmation agreement after you sign it.
- In some cases a reaffirmation agreement may modify the loan for the debtor to lower their monthly payments, and or the total amount owed on the loan.
- A debtor cannot force a creditor into a reaffirmation agreement. Likewise, a creditor cannot force a debtor to sign a reaffirmation agreement. More plainly stated, both parties must independently agree to the terms of the reaffirmation agreement and sign it for it to be valid.
When Do I Sign A Reaffirmation Agreement?
- You must sign the reaffirmation agreement before the court enters a discharge in your case.
- If you change your mind you can cancel the agreement anytime before your discharge or 60 days after the agreement is filed with the court, whichever comes later.
Am I Required To Sign A Reaffirmation Agreement?
- NO! You are not required to sign a reaffirmation agreement. We suggest to our clients that they do what is call a “Ride Through”, where they just continue to send the monthly payments to the creditor without signing a reaffirmation agreement. Over 90% of creditors will allow debtors to do this. As long as the loan payments are made on time, the creditor will not seek to repossess or foreclose on the property.
What Happens If I DO Sign A Reaffirmation Agreement?
There are pros and cons to signing a reaffirmation agreement. In my opinion the cons outweigh the pros.
- The creditor will report your monthly payments on your credit report, which can have a positive effect on your credit rating.
- The creditor will mail you monthly billing statements (Note: What is the advantage of this?)
- Signing a reaffirmation agreement creates a situation that allows the creditor to sue you despite your having filed bankruptcy.
- When you sign a reaffirmation agreement you are essentially reestablishing your personal obligation to the debt. The consequences of such can be extreme. An example of the consequences is that if you sign a reaffirmation agreement and ever become delinquent or unable to make the payments, the creditor may repossess the collateral. The collateral is normally sold at an auction. If the auction does not bring in enough money to pay off the loan (and normally cars sold in this manner don’t bring in enough money) a deficiency is established. You can count on being sued by the creditor if there is a deficiency and you signed a reaffirmation agreement.
What Happens If I DON’T Sign A Reaffirmation Agreement?
Again, there are pros and cons to not signing a reaffirmation agreement.
- Even without a reaffirmation agreement, you may opt to continue making payments on a secured debt. As long as you make the payments on time, you can keep the property.
- If at any time after the bankruptcy you find yourself unable to afford the payments, you can walk away from the obligation and the creditor will not be allowed to sue you to collect any deficiency, though you will have to sacrifice the property.
- If you don’t sign the reaffirmation agreement and are just one day late with making your payment, the creditor can come repossess the property.
- Most creditors will choose not to report your payments to the credit reporting agencies, so there is no benefit to your credit rating.
- Most creditors will choose to no longer send you monthly billing statements (Note: What is the disadvantage of this?)
To Reaffirm or Not to Reaffirm
Considering the pros and cons of both signing and not signing, Marks Law Firm rarely recommends to our clients to sign a reaffirmation agreement. Our reasons for that are easy to understand:
- It isn’t really necessary to reaffirm a debt to keep your property
- What you gain from the agreement – monthly statements and credit reporting – is minimal.
- By signing a reaffirmation agreement, you’ve put yourself in a position to be sued and potentially have your wages garnished and/or bank accounts frozen – which is precisely what you were trying to avoid by filing bankruptcy in the first place.
All of that notwithstanding, a couple key points that you must remember are
- A Reaffirmation Agreement is a voluntary act and bankruptcy law does not encourage the reaffirmation of dischargeable debts. In other words, you have the right to refuse to sign an agreement.
- A Reaffirmation Agreement is not valid and binding unless the Bankruptcy Court approves it.
- You do have the right to attempt to negotiate different terms for a Reaffirmation Agreement.
To learn more about reaffirmation agreements, or for a free bankruptcy consultation, contact Marks Law Firm today. The attorneys at Marks Law Firm have the experience you need and can usually protect your interest in most of your assets.