Reaffirmation Agreement for Bankruptcy

Chapter 7 Bankruptcy is sometimes called a “liquidation bankruptcy”. This is because it involves liquidation of all of the debtor’s non-exempt assets and the proceeds are then used to pay creditors. However, there are often assets that the debtor does not want to get rid of, such as a car, boat, or any other valuable or useful personal property that have loans on them.  There is a way for a debtor to hold onto certain property when going through Chapter 7 bankruptcy and continue to make payments on that item.  It is called a reaffirmation agreement.   

What Is a Reaffirmation Agreement?

Under normal circumstances, once debt is discharged from Chapter 7 Bankruptcy, the lender can repossess the collateral if monthly payments are not made to the creditor.  This could be a vehicle, RV, or anything else that was purchased with a secured loan. This can be stopped by signing a reaffirmation agreement. The reaffirmation agreement allows the debtor to reassume personal responsibility for the loan, keep the collateral, and have the credit reporting remain on the credit report. As Chapter 7 Bankruptcy breaks all contracts, the reaffirmation agreement is basically recreating (“reaffirming”) the contractual agreement between the debtor and lender. It should be noted that reaffirmation agreements are not always a good idea. For example, if you were struggling to make payments previously, you may fall behind yet again.  And you would be on the hook for the balance if the collateral was later repossessed. 

Why Would Someone Choose to Reaffirm a Debt?

There are two main reasons why someone may choose to reaffirm a debt. The first is to retain ownership of a valuable asset and be able to communicate with the lender after the bankruptcy. Debt is often reaffirmed for cars as they are needed for getting to work and functioning in day-to-day life. The same is true for homes.  It must be noted that in almost all cases, a lack of a reaffirmation does not mean you’ll lose the asset.  It just means the lender will not communicate with you.  If you fall behind on the payment after the bankruptcy case, two things may happen: 1) there will not be a typical collection call from the lender letting you know you are at risk for repossession, and 2) if the item is repossessed, you cannot get the item back from the creditor until you pay off the entire loan balance and not just the missed payments. 

The second reason someone may choose to reaffirm a debt is to help quickly rebuild credit. After declaring bankruptcy, the debtor’s credit report lacks tradelines.  This can make it extremely difficult to obtain loans, credit cards, or rent an apartment for the first couple of years. Due to this, people’s first priority after bankruptcy is often rebuilding their credit. Reaffirming the debt and making timely payments allows a person to quickly begin the process of rebuilding credit.  The tradeline remains on the credit report, which provides a significant boost to the credit score.  

How Long Do You Have to File a Reaffirmation Agreement?

Unfortunately, you cannot take your time when it comes to reaffirmation agreements. There is a very strict deadline that must be met. This deadline to file the reaffirmation agreement is 60 days after the meetings of creditors.  And keep in mind, you, your lawyer, and the creditor must all review and sign the reaffirmation agreement prior to its filing.  In rare circumstances, the court may agree to an extension of this deadline if your lawyer files a motion seeking an extension of the deadline.  It is important to meet with a bankruptcy attorney to determine which debts, if any, should be reaffirmed.