Reaffirmation agreements are like a deal you make during Chapter 7 bankruptcy. Normally, when you file for Chapter 7, it cancels out your old contracts, giving you a fresh financial start by wiping out debts. But sometimes, you might want to keep certain things, like your car. So, you decide to keep paying a debt, even if you could get rid of it in bankruptcy.
To do this, you sign a reaffirmation agreement with the creditor. This means you promise to stick to the deal, even if things get tough and you struggle to make payments. The government added rules to the Bankruptcy Code to protect people from getting taken advantage of when they make these agreements. These rules make sure debtors are treated fairly when entering into reaffirmation agreements.
Before we continue, I want to be clear. In my 15 year experience as a Bankruptcy Attorney I would say I have only suggested reaffirmation 1 time in my entire career. This was when my Client was told by her lender that she needed to reaffirm her vehicle to be able to take it out of the country. In this case, reaffirming provided assurance to the bank that the car loan would be honored before allowing the vehicle to leave.
In all other cases, my recommendation is to “pay as agreed” without signing the reaffirmation agreement. This means staying current on payments to keep using the car. If future problems, like a costly transmission repair, arise or the client just no longer wants the vehicle, they can stop payments without any negative consequences— but this is possible only if reaffirmation hasn’t taken place.
Which Debts Can You Keep Through Reaffirmation?
Typically, you can only reaffirm secured debts, meaning debts tied to collateral. The main types are car loans and mortgages. If you want to keep your car or home, you might decide to stick with these debts to avoid losing the collateral. In a secured debt, the creditor has a “security interest” in the purchased property, like a car or appliance, which protects them if you can’t repay. Bankruptcy doesn’t erase these interests, so to keep the property, you may need to sign a reaffirmation agreement committing to continue payments during and after bankruptcy. It’s usually not recommended unless you know for certain you can afford to make the payments.
Why Would You Sign a Reaffirmation Agreement?
Reaffirmation agreements are entirely optional. Debtors are not obligated to reaffirm any debts, ever. If they choose to sign one, they commit to paying a debt that could otherwise be discharged. Signing a reaffirmation agreement essentially means entering into a new and separate contract. In the future, if you fail to meet the agreed-upon terms, you can be taken to court. By doing this, you’re voluntarily taking on the responsibility for a debt that you’re otherwise eliminating through bankruptcy. Keep in mind that there are alternative ways to negotiate payments with creditors without entering into a reaffirmation agreement. Importantly, creditors cannot force debtors into signing such agreements.
Contrary to some legal blogs, signing a reaffirmation agreement does not actually protect a co-signer or co-borrower. If you’ve already defaulted on payments and file for Chapter 7 bankruptcy, the damage to the co-signer’s credit score is already done. However, if you’re up to date on payments, there’s no harm to the co-signer, and you can just continue making payments after bankruptcy without reaffirming the debt. The key for the lender is receiving their money; as long as payments are made, there won’t be a negative impact on the co-borrower’s credit score.
It’s important to question the idea of re-burdening yourself unnecessarily for the supposed benefit of easing the co-borrower’s mind. Often, these tactics are driven by the interests of car finance companies seeking to boost their profit margins. The more reaffirmation agreements they secure, the better it is for their bottom line. It’s crucial for consumers to be aware of these dynamics and carefully consider whether signing such agreements truly aligns with their best interests.
Things to Think About Before Reaffirming
Reaffirming a debt during bankruptcy continues payment responsibilities and can have serious financial consequences. Before you commit to such an agreement, think about the following:
- Wants vs. Needs: Consider whether keeping the property is a genuine necessity. Reaffirm only on essential items to prevent perpetuating financial challenges. Additionally, it’s crucial to assess the affordability, replacement cost, and age of the property. Keeping an old vehicle with a high 25% interest rate may not be wise if you can easily replace it with another vehicle that has a lower interest rate. Consider these factors to make a practical decision that aligns with your financial well-being.
- Affordability: Evaluate if you can realistically afford the debt you’re considering for reaffirmation. Avoid signing if there’s a risk of struggling with payments, as defaulting may lead to personal liability and potential property repossession. Moreover, it’s important to note that the court won’t approve a reaffirmation if it’s evident that the new payments are beyond your financial means. The court considers affordability before granting approval for reaffirmation agreements.
- Behind on Payments: Keep in mind that negotiating with your creditor can be part of this process. It’s not a strict “take it or leave it” situation, and I have found you actually have some bargaining power. If the creditor doesn’t get a reaffirmation agreement, they would need to repossess the property, take care of repairs and maintenance, and try to resell it at market value. This is a significant risk for them. It’s always worth asking for a reduction in interest rates or asking to bring your loan current in the new reaffirmation agreement.
- Creditor’s New Loan Terms: Be cautious of enticing new credit offers, lower interest rates, or improved terms. Assess whether you can genuinely meet the ongoing payment obligations. That’s all that matters.
- Creditor’s Claims: Verify if the creditor can repossess property in case of non-repayment, especially for secured debts like car loans.
- Real Property Loans: For loans on real estate, such as a mortgage, assess the need for reaffirmation, especially if you’re current on payments. Seek legal advice to explore options like the debt “riding through” bankruptcy without reaffirmation.
- Reaffirmation for Credit Improvement: Reaffirming solely for credit improvement is not advisable. Sure, signing a reaffirmation agreement will keep the payment history on your credit history after the bankruptcy is complete, but at what cost? If this is an unhealthy financial decision it will almost certainly lead to problems down the road, and usually much sooner than you think. Alternative methods, like timely bill payments, maintaining low credit card balances, and reducing open credit card accounts, are more prudent ways to enhance credit.
By addressing these considerations, individuals can make informed decisions regarding reaffirmation agreements, ensuring their choices align with their financial well-being.
Can You Sell Your Vehicle or House if You Don’t Reaffirm?
The assertion that you must reaffirm to sell your property is often misinformation spread by banks to encourage reaffirmation. Reaffirmation agreements put you back on the hook for the loan after bankruptcy, benefiting the banks financially.
Selling property without reaffirmation is a straightforward process. For a home, you request a payoff from the mortgage company, which outlines the amount owed and wire instructions. If the title company wires this amount to the mortgage company, the lien is paid off, and the mortgage company releases the lien. Refusal to issue a payoff letter due to non-reaffirmation likely violates statutes and the discharge injunction.
Similarly, for a vehicle, obtaining the payoff amount allows you to sell it. Your ownership is not affected by non-reaffirmation, and the bank cannot prevent you from selling your property. Furthermore, upon completing all payments for your vehicle, the bank will proceed to lift its lien from the title and issue the clear ownership title to you. I must note that opting not to reaffirm the debt has no impact on this standard procedure. Don’t let misinformation confuse you; you retain ownership rights, and selling without reaffirming is always a valid option.
Consequences of Entering into a Reaffirmation Agreement
When a debtor commits to a reaffirmation agreement, they become obligated to pay the reaffirmed debt. Essentially, the reaffirmed debt is treated as if the debtor never went through bankruptcy, carrying notable financial implications. For instance, if a debtor reaffirms a car loan and later misses a payment, the creditor may repossess the car and sue the debtor again for the remaining loan balance. Double trouble.
If a debtor is unable to meet the obligations of the reaffirmed debt, they must wait eight years from the bankruptcy filing date before being eligible to file for bankruptcy again to discharge that specific reaffirmed debt.
Given the significant ramifications, it is crucial to fully comprehend the terms of a reaffirmation agreement before signing. This includes understanding the total owed amount, payment schedule, and any rights the creditor may possess to seize the property in the event of payment failure.
When is the Deadline to File a Reaffirmation Agreement?
A reaffirmation agreement needs to be entered into and filed before the discharge is granted, making it valid and binding. Any party, whether the debtor or a creditor, can file an executed reaffirmation agreement. This filing must occur within 60 days after the initial date scheduled for the first meeting of creditors in the bankruptcy case, unless the court extends the deadline. You can find the date for your creditors’ meeting on the Notice of Bankruptcy that you receive once your case is filed with the court.
Do I need an Attorney to File a Reaffirmation Agreement?
While it is strongly recommended to seek the guidance of an attorney, it is not mandatory for a debtor to have one when entering into a reaffirmation agreement. In fact, your creditor will be more than happy to handle the drafting and filing of the reaffirmation agreement. The key is whether you understand the terms of the agreement and whether they are affordable and fair to you. This is where the expertise of an attorney becomes invaluable, ensuring you fully understand the implications and fairness of the agreement.
If a debtor is represented by an attorney, the attorney must provide written certification that they advised the debtor on the legal effects and consequences of the reaffirmation agreement, including potential defaults. The attorney also needs to certify that the debtor made an informed decision, voluntarily chose to reaffirm the debt, and that the reaffirmed debt won’t cause undue hardship for the debtor or dependents.
For debtors without legal representation, after filing the agreement with the bankruptcy court, they will receive a hearing date to appear before a judge. During this hearing, the debtor must explain the reasons for wanting to reaffirm the debt and demonstrate an ability to afford the payments. The judge must approve the reaffirmation agreement, ensuring it is in the debtor’s best interest and does not impose undue hardship.
Is it possible to cancel a reaffirmation agreement after the court has granted it?
A debtor has the right to cancel a reaffirmation agreement at any time before (whichever is later)
(1) 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.
How do you Rescind or Cancel a Reaffirmation Agreement?
If you intend to cancel your reaffirmation agreement, make sure you have the following information:
- Reaffirmation Agreement Details:
- Date the reaffirmation agreement was filed with the Court.Name and mailing address of the creditor (or creditor’s attorney) as listed on the reaffirmation agreement filed with the Court.Status of the Court’s discharge issuance, including the date if applicable.
- Keep Your Deadline in Mind:
- Recognize that the cancellation deadline is either the date of discharge or 60 days after the reaffirmation agreement was filed with the Court, depending on which date is later.
- Mail the Notification:
- To cancel the reaffirmation agreement, notify the creditor in writing. Certified mail with a return receipt postcard is advisable for proof of rescission.
- Court Notification:
- File a notification of the cancellation with the Bankruptcy Court to create a record on your case docket.
