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Here is some general information about reaffirmation agreements.  If you have questions be sure to contact us for more information.

What is a Reaffirmation Agreement?

When you sign a reaffirmation agreement, you agree that even though you have filed bankruptcy, and your debt to that creditor is discharged as to you personally, you are going to give up that right and agree to still be personally responsible for that debt. You can reaffirm only secured debts. When you sign a reaffirmation agreement, the creditor can sue you if you fail to pay the debt as if you never filed bankruptcy for that particular loan. When you file bankruptcy, any secured creditor you owe will likely send us a reaffirmation agreement for you to consider signing.

We almost always get reaffirmation agreement proposals from car financing companies, but rarely, if ever, for mortgages.  You can choose to reaffirm your car loan or your mortgage if you want to.

What are your rights regarding secured loans once you file bankruptcy?

It is easier to explain your rights about secured loans by using an example. An example of a secured debt is a car loan. When you file bankruptcy, the car loan debt is discharged as to you personally; you have no obligation to pay it. However, if you want to keep the car, you have to continue to pay on the loan. The bankruptcy court can't get rid of the security interest in the car (except in special circumstances), so while the creditor can't come after you if you don't pay, the creditor can take the car back if you don't pay. Sometimes the collateral is the item that the loan proceeds were used to purchase (e.g. a car loan to purchase a car). Sometimes the collateral is another item (e.g. a home equity line of credit to buy a car. In that case, your house is the collateral for the car.) Often, furniture loans and jewelry loans are secured too, but people don’t always think of them as such.

Because the creditor cannot come after you personally if you don't pay, if at some point in the future you decided you didn't want to keep your care anymore, you could give the car back to the creditor (voluntary repo), the creditor could not sue you for the deficiency. If you stop paying on the loan, the creditor still has the right to repossess the car (the collateral). Since the debt has been discharged as to you personally, the creditor cannot sue you for any difference between the value of the car and the amount the creditor receives when the car is sold at auction (called the “deficiency”.) and returning the car at that time will not affect your credit since it cannot be reported on your credit.

Why would you reaffirm?

Under the bankruptcy law prior to the changes that took place in 2005, reaffirmation agreements were rare. Unless you purchased a vehicle right before you filed bankruptcy (which would most likely not be discharged if the creditor objected since you did it right before you filed), it was extremely rare to agree to reaffirm a debt. You just had to keep making timely payments, and you could keep the collateral. This was often called a "ride through."

Under the new bankruptcy law, however, debtors are technically required to “attempt” to reaffirm the debt, to keep the collateral, even if they are making timely payments. Failure to attempt to reaffirm allows a creditor under the Bankruptcy Code to repossess the collateral under the bankruptcy code, but under state law, you have to be delinquent in making your payments before a creditor can take back collateral.  If your income is less than your expenses on your bankruptcy petition, your attorney has to recoomend to the court that the reaffirmation agremeent will not be a hardship to you.  I talk to each of my clients about the pros and cons of reaffirming before making a recommendation to the court.

There are two benefits to reaffirming a debt:

1.  The creditor will report your on-time payments to the credit bureaus.  This can help you rebuild your credit.  Note that the creditor can also report any late payments.  If you don't reaffirm, the payments you make are considered to be "voluntary" payments, and therefore the creditor will not notify the credit bureaus if you are late or on-time.  If you don't have a lot left on your car loan (and even if you do, but obviously there is more risk involved in reaffirming a large debt) you may want to reaffirm for just this reason.

2.  Often if you do not reaffirm, you can no longer pay your bill online, but must mail it to a special bankruptcy address the creditor wants you to use, or you can make a payment on the phone, usually without an additional fee.  The convenience of being able to pay your bill online is something you would miss and you may want to reaffirm for that reason.


Will the Court allow you to reaffirm?

The Bankruptcy Court must approve all reaffirmation agreements. Your lawyer has to certify that it is not an undue hardship. If your expenses are higher than your income, the Court will likely not allow you to reaffirm unless your lawyer says it is not an undue hardship to you.

Should you reaffirm?

It really depends on you.  It isn't necessary to reaffirm. Since the passage of the new bankruptcy law in 2005, it is extremely rare to see a creditor attempt to repossess a vehicle or other collateral. I have seen a creditor threaten to repossess a car only a handful of times since the law passed in 2005 and that was when the law was first passed.  Since 2005 I have never once had a creditor take collateral for failure to reaffirm. Why agree to a debt that has been discharged if you don’t have to? However, the decision of whether or not to reaffirm is ultimately up to you and you should review the information about the benefits of reaffirming, above.

Even if you choose to reaffirm, you have 60 days after your discharge to cancel the reaffirmation agreement. However, once you receive your discharge, you cannot then choose to reaffirm a debt - even if the creditor repossesses the vehicle. Once you pay off the loan, the creditor CANNOT repossess the vehicle, even if you did not reaffirm.  

The benefits of not reaffirming are you can return the car at any time - for example you get into an accident and the car is totaled, or it needs major repairs you cannot afford.  The repossession will not affect your credit because a debt that isn't reaffirmed cannot be reported to the credit bureau if you stop paying it.  Your credit takes the "hit" when you file the bankruptcy, not if you give the car back three years later.

A special note about mortgages:  In Pennsylvania, if you don't reaffirm your mortgage, the mortgage company still has to go through a full foreclosure action if you stop paying on the mortgage and they cannot foreclosure merely because you didn't sign a reaffirmation agreement.  The same rules apply as to cars in that if your loan is not reaffirmed, on time payments won't be reported to the credit bureaus.  If you choose to walk away from your house any time after your bankruptcy, and if you have not reaffirmed the debt, the foreclosure will not show on your credit because it happened after you discharged the debt. So if you want to stay in your house, but are concerned about whether or not you will really be able to afford to do so, you don't need to make that decision right away.  You can stay as long as you can afford to, and if you decide later on - even years after your bankruptcy - that you don't want to stay in the house, you can walk away.

Are there any other options?

Yes. In some cases, you can redeem a debt. Redemption is where you pay a lump sum payment to a creditor equal to the fair market value of the collateral. Often this is difficult to do with a car unless you can come up with that lump sum. However, with jewelry and furniture loans it is usually pretty easy, and the creditor will take a small percentage of the property. Of course, you can tell the creditor they can just come and repossess the property - in the case of furniture that is very unlikely.