When going through Chapter 7 Bankruptcy, one or more of your creditors may want you to sign a reaffirmation agreement. If you do not have an attorney by your side, you may sign this not fully understanding the repercussions of this action. Typically, a bankruptcy attorney will advise you against signing a reaffirmation agreement. To best understand why, you will need to know what a reaffirmation agreement is and when or when not to form the agreement.
What is a Reaffirmation Agreement?
A reaffirmation agreement is an agreement made between a creditor and a debtor (you) to waive the discharge of a secured debt. The debtor signs this agreement and retakes the responsibility of the debt, typically at the same loan terms and payment requirements. A reaffirmation agreement is commonly used in the case of a mortgage or car loan. Should you stop making payments then you are still liable for the debt as if you had never filed bankruptcy; the car can be repossessed or the home foreclosed on.
Reaffirmation of a Mortgage or Car Loan
If you are going through a bankruptcy but have been managing to make your mortgage or car payments on time, you can choose to reaffirm your debt or turn your home or car back over to the bank and have the debt discharged in the bankruptcy.
If you are financially able to and wish to keep your home or car after a bankruptcy, you can sign a reaffirmation agreement with the lender to resume responsibility of the debt and future payments. By signing a reaffirmation agreement and continuing to make payments, the credit bureaus are notified of your continued good standing with your loan. This can help to repair your credit with a bankruptcy on your record.
However, reaffirming your loan means that if you miss a payment, the bank can begin collection actions against you – such as putting the home through foreclosure or repossessing the car. If the home is sold as a foreclosure for less than you owe, you are responsible for the deficiency balance. Same goes with a vehicle – if it is sold by the bank for less than your remaining loan balance, you are responsible for the difference. If you were to continue with your bankruptcy without signing a reaffirmation agreement, this deficiency balance would be discharged.
Before considering a reaffirmation agreement, you need to carefully consider what brought you to filing for bankruptcy. The point of bankruptcy is to give yourself a fresh financial start and a reaffirmation agreement defeats that purpose. Were you only able to make your mortgage payment because you relied on credit cards for everything else? Can you still afford the payments of your vehicle moving forward? Will continuing to make the payment put you back into financial distress? You may wish to keep your home or car but you need to first consider if it is worth keeping. Knowing the financial strain that keeping a mortgage or car payment can be, is why many bankruptcy attorneys advise against signing a reaffirmation agreement.