What is a reaffirmation agreement?

Understanding reaffirmation agreements

A reaffirmation agreement is an agreement between you and one of your secured creditors to “reaffirm” the obligations on the debt that existed before your bankruptcy filing, according to Justin M. Gillman, an attorney at Gillman Capone Law in New Jersey.

If you file for bankruptcy, your debts are typically discharged at the end of the process. This means you no longer have to pay them, and creditors can no longer come after you. But for various reasons, you might have some debts you don’t want to get rid of as part of the bankruptcy process.

Consider a car loan for a vehicle drive every day or a mortgage on a house you still live in. These assets can remain outside the bankruptcy by filing a reaffirmation agreement. This basically tells the court you’ll continue making payments for this particular asset.

“Reaffirmation can apply to either real property or personal property,” said Gillman. “However, there are big differences in the bankruptcy code about the requirements to reaffirm a secured debt on personal property and a secured debt on real property like a mortgage or home equity line of credit (HELOC).”

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What is the process of reaffirming a debt?

If you have a debt you’d like to have reaffirmed, include a reaffirmation form in your bankruptcy petition. Then, you’ll review and sign a reaffirmation agreement, and the creditor will file the agreement with the court for approval.

Higher loan amounts have lower chances of being approved for reaffirmation.

Ashley Morgan, a bankruptcy attorney in Herndon, Virginia, emphasizes that the form has to be approved by a bankruptcy court judge. “A judge may not sign off on a reaffirmation because they want to make sure a debt is not going to overburden you and get in the way of you making a fresh start after bankruptcy.”

If you default on reaffirmed debt, the creditor can immediately repossess the asset or sue you for the balance. If your income is uncertain or your debt outweighs it, a judge is less likely to approve a reaffirmation since there’s more uncertainty about your ability to make payments. “A judge needs to be confident that you’ll be able to make payments going forward,” says Morgan.

What happens if a reaffirmation agreement is denied?

The main reason a court might deny a reaffirmation request is that it doesn’t have a high level of confidence in your ability to continue making timely payments on the reaffirmed debt. In this scenario, you no longer own the asset. The lender may still allow you to keep the asset and continue paying on it, but it isn’t required to do this. If you miss a payment after your bankruptcy case closes, the lender is highly likely to either repossess the asset or sue you in court for the remaining balance.

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Benefits and risks of reaffirmation agreements

Examining your financial situation and carefully weighing whether you can handle the debt with your current income is important. By making regular, on-time payments for the reaffirmed asset, you can repair your credit score more quickly. But if you’re in a tight financial situation, there are risks associated with retaining debts you’ll still be responsible for paying.

How reaffirmation agreements affect bankruptcy

If the court accepts your reaffirmation agreement, you can continue to pay the loan, and you can maintain possession of the asset. Otherwise, says Gillman, the reaffirmation of a debt in a Chapter 7 bankruptcy does not play a large role in the case. Rather, “it is important to the person who files for bankruptcy to be able to maintain certain obligations to allow them to move forward in their life,” he said.

After you file for reaffirmation, there will be a short period of time during which you can decide to revoke the agreement. Often, a reaffirmation agreement can be canceled within 60 days or on the date of bankruptcy discharge, whichever is sooner. According to Gillman, this process involves filing a cancellation form with the court.

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Alternatives to reaffirmation agreements

There are a few alternatives to a reaffirmation agreement if you don’t feel the reaffirmation process is right for you or the court denies your request. You can redeem the asset, retain the asset or surrender the asset.

• Retain: Morgan often recommends a “Retain and Pay” agreement to their bankruptcy clients with car loans. “Here, you’ll keep paying the loan to keep the car, and you’ll get the title when you pay the car off,” she said.
• Redeem: To redeem the asset, you’ll pay one lump-sum payment to your creditor. This is a good option if the asset’s value is much less than the debt (this is often the case in vehicles and home furnishings).
• Surrender: Even in bankruptcy, you’ll still have to continue paying on secured debt. Surrendering a secured asset back to the creditor is a good way to avoid this. You can return the asset to the creditor, and it will apply the value of the asset to your debt. Then, the remaining balance owed can be discharged in the bankruptcy as unsecured debt.

Bottom line

A reaffirmation agreement is a legal contract in bankruptcy where a debtor agrees to continue paying a dischargeable debt, typically to keep secured collateral, like a car or home, despite the bankruptcy discharge.

The court handling your bankruptcy proceeding must first accept your reaffirmation request. If it’s denied — often because the judge does not have confidence in your financial situation — the debt will be discharged like the rest of your debts.

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