What Is a Reaffirmation Agreement in Chapter 7 Bankruptcy?

A reaffirmation agreement is a contract you sign after filing for bankruptcy. You agree to continue making payments, keep your home or vehicle, and remain personally liable for the debt. Reaffirmation agreements let you keep the property, but you lose the benefit of having the debt on the secured asset wiped out.

It makes sense to sign a reaffirmation agreement for certain types of property under the right circumstances. However, alternatives may let you keep the property without signing a new agreement. Talk to a local bankruptcy lawyer about when you should consider a reaffirmation agreement in your bankruptcy case.

Understanding What a Reaffirmation Agreement Means for Your Bankruptcy

In a Chapter 7 bankruptcy, your non-exempt assets are sold to pay off your debts. For secured debts, you can give the property back to the lender or sign a reaffirmation agreement to continue making payments so you can keep the property.

Once you sign a reaffirmation agreement, you lose the bankruptcy debt relief benefits for that individual debt. However, you can keep the property as long as you continue making payments.

Chapter 7 bankruptcy is a way for you to erase all your dischargeable debts and get a fresh start. Filing Chapter 7 liquidation bankruptcy puts an automatic stay on any collection activity, including foreclosure, liens, and creditor lawsuits. The bankruptcy court appoints a trustee to manage the bankruptcy estate, including all non-exempt property.

The bankruptcy trustee may liquidate valuable nonexempt assets and use the proceeds to pay creditors. After completing the bankruptcy process, your unsecured debts are discharged. Chapter 7 generally discharges your personal liability for dischargeable secured debts, but a valid lien usually survives bankruptcy unless it is avoided or otherwise addressed.

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Secured Debts and Reaffirmation

Secured debt is backed by an asset, including car loans, mortgage loans, or home equity loans. In Chapter 7 bankruptcy, a secured creditor does not automatically receive the asset, although its lien generally survives.

If you surrender collateral, you may lose any equity in it, and Chapter 7 generally discharges your personal liability for any dischargeable remaining balance.

Reaffirming the loan creates a new legal agreement with new payment terms and obligations. By reaffirming your personal liability for the debt, you will not discharge the debt after bankruptcy. However, you can continue to use the secured property during and after bankruptcy if you comply with the reaffirmation agreement terms.

When Would You Sign a Reaffirmation Agreement?

You may consider signing a reaffirmation agreement if you’ve made significant payments toward the property.

For example, after making payments for 20 years on a 30-year home loan, surrendering the collateral would wipe out 20 years’ worth of payments toward the loan. Similarly, if you are close to paying off your auto loan, it makes financial sense to reaffirm the agreement for the remaining payments and keep your vehicle.

You may also benefit from a reaffirmation agreement if you have good loan terms. For example, if you got a property mortgage when rates were at an all-time low, you would not want to give up those favorable loan rates. A reaffirmation contract would preserve those loan terms.

If you do not sign a reaffirmation agreement and are not current on payments, the lender may repossess your car or foreclose on the property. If you need the property and have no other way to keep the property (like a retain-and-pay agreement), the reaffirmation agreement may be your only option. However, only consider signing when you are sure you can keep up with the payments.

Reaffirming an unsecured debt is legally permitted, but it is usually risky because Chapter 7 generally discharges unsecured debts. Some unsecured debts, including certain taxes, domestic support obligations, and student loans, may be excepted from discharge.

How Do You Execute a Reaffirmation Agreement?

You only have a limited time after filing your bankruptcy petition to execute a reaffirmation agreement. You must file a statement of intention within 30 days after filing the petition or on or before the first date set for the meeting of creditors, whichever is earlier.

The party filing the reaffirmation agreement must also file a Reaffirmation Agreement Cover Sheet with the bankruptcy court. The court generally holds a hearing to approve a reaffirmation agreement only when the debtor was not represented by an attorney during the agreement’s negotiation, although the court may also review an agreement when a presumption of undue hardship arises.

Make sure you understand the risks of a reaffirmation agreement before signing. However, you have a right to rescind a reaffirmation agreement by giving notice to the secured creditor before discharge or within 60 days of filing the agreement, whichever is later.

What Are the Legal Consequences of Signing a Reaffirmation Agreement?

A reaffirmation agreement confirms that you remain personally liable for the debt, which bankruptcy will no longer erase. If you cannot keep up with the payments under the new agreement, the creditor can repossess the property, and you will be liable for repaying any remaining balance.

The creditor could pursue the remaining debt through wage garnishment, liens, or a levy on your bank account. If you are not sure that you can make the payments, do not sign a reaffirmation agreement without consulting your attorney.

Are There Alternatives To Reaffirmation Agreements To Keep Your Property?

There are alternatives you should consider before reaffirming secured debts. You may need a car but not necessarily the car you have with your loan.

It may be much less expensive to surrender your current car and buy a less expensive vehicle. Another option, for qualifying tangible personal property, is to redeem the property by paying the allowed secured claim in a lump sum.

Talk to your bankruptcy lawyer about your options to keep as much as you can while discharging the maximum amount of debt.

How Talking to a Bankruptcy Lawyer Can Help

Reaffirmation agreements are tough to navigate. You may feel attached to the car or house, even if reaffirming your personal liability doesn’t make financial sense. A bankruptcy lawyer can explain your options and help you make the best decisions for your financial future.

Contact a local bankruptcy attorney for more information on how you should handle reaffirmation agreements in your Chapter 7 filing.