By: Crystal H. Thornton-Illar, Esq.
While a bankruptcy is primarily geared to assist you in shedding debt, you may want to recommit to the terms of certain debts, such as your home or vehicle loan. An agreement to repay such debt is called a reaffirmation agreement. The decision to reaffirm any debt should be very carefully considered.
What is a reaffirmation agreement?
A reaffirmation agreement is a contract that promises to repay a debt, which would have otherwise been discharged in bankruptcy. Reaffirming a debt means that you are recommitting to the terms of the loan. In most cases, it will be as if you never filed for bankruptcy as to that debt. Reaffirmation agreements are voluntary. There is no requirement that you execute a reaffirmation agreement.
What are the benefits of executing a reaffirmation agreement?
Reaffirming a debt informs the lender that you intend to continue to pay the loan. Generally, the lender will continue to report the loan and all payments made on that loan to the credit reporting agencies, which may help improve your credit score after bankruptcy, provided timely payments are made on the loan. Many lenders will not report payments to credit reporting agencies if a reaffirmation agreement is not signed.
Additionally, the lender will normally communicate with you and provide information to you regarding the loan once the reaffirmation agreement is executed. If a reaffirmation agreement is not executed, many lenders will refuse to communicate with you or provide you with information regarding the loan, including a monthly statement.
What are the cons of executing a reaffirmation agreement?
Reaffirming a debt will make you personally liable for that debt even after your bankruptcy. If you are unable to make payments after executing a reaffirmation agreement, the lender will take the collateral and may sue you for any deficiency. If you do not execute a reaffirmation agreement and are unable to make the payments, the lender will take the collateral, but you will not be responsible for any deficiency.
Who should reaffirm?
Only secured loans should be reaffirmed. Additionally, you should only reaffirm if you are current on the loan and confident that you can continue to make future payments. In deciding whether to reaffirm, you should also consider the amount of equity you have in the asset. You should not reaffirm a loan if you owe significantly more on the loan than the asset is worth, especially a vehicle loan, as the value of the vehicle is likely to depreciate.
Technically, lenders can repossess a vehicle if a reaffirmation agreement is not signed, but that rarely happens if the debtor continues to make regular timely payments. Most lenders want money, not collateral. However, the occasional lender will insist on a reaffirmation agreement if the debtor wants to retain a vehicle, and in those instances, a reaffirmation agreement may be necessary. However, even in those instances, you should never execute a reaffirmation agreement unless you are comfortably able to make the payments.
Many people have successfully retained their homes and/or vehicles by continuing to make regular timely payments after bankruptcy without executing a reaffirmation agreement.
How do I reaffirm a debt?
Generally, the creditor will prepare a reaffirmation agreement and send it to your attorney to review and discuss with you.
Reaffirmation agreements must be filed prior to the entry of the discharge order. Typically, the reaffirmation agreement becomes effective upon the timely filing of the agreement. If the Court has questions, it may schedule a hearing on a reaffirmation agreement and order you to appear and answer questions. It is not uncommon for the Court to deny a reaffirmation agreement after such a hearing.
Reaffirmation agreements should be carefully considered. Leech Tishman is prepared to assist you in navigating through the entire bankruptcy process, including any decision regarding reaffirmation agreements. Please contact us at 412.261.1600 to set up your free consultation.