What is a Reaffirmation Agreement?

Do you want to reaffirm certain types of old debt?

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A Chapter 7 bankruptcy case does not eliminate all debt. Some debt survives because it cannot be discharged in a bankruptcy case. This might include recent taxes or domestic support obligations like child support and alimony. There may other types of debt that you will want to keep even after your bankruptcy case is completed.

What is Secured Debt and Unsecured Debt?

If your goal is to wipe out your debt, maybe you're wondering why you would want to try to keep any of it that you don't have to. It has to do with the type of debt we're talking about. Much of the debt you'll include in the bankruptcy case is unsecured. That means it has no collateral that a creditor can use to pay the debt if you can't or don't make the payments. Unsecured debt includes credit cards, medical bills, and many personal signature loans.

When you put up collateral, we call that secured debt. Secured debt actually consists of two separate agreements. One is the promissory note or promise to pay. The other is the security agreement, in which you agree that the creditor can take the collateral to satisfy the debt if necessary. Secured debt includes home mortgages, car loans, boat loans and some loans for other personal property. 

A Chapter 7 case will likely discharge the promissory note on a secured debt but it has no effect on the security agreement. Therefore, you could come out of bankruptcy with no personal liability on the car loan, but the creditor will still have rights in the car and can repossess it after the case is over. 

A Reaffirmation Agreement Can Protect Your Collateral

A reaffirmation agreement is a contract that you sign with the secured creditor that takes the debt out of the bankruptcy altogether. You remain liable to the debt, but you get to keep the collateral as long as you keep the terms of the note and do not default on it. 

Basics of the Reaffirmation Agreement

Because the bankruptcy discharge wipes out your personal liability for most of your debts, that previous contract you signed for a car loan is effectively wiped out. If you choose to sign a reaffirmation agreement, you are agreeing to take on that same old debt that would have otherwise been wiped out by the bankruptcy. The agreement is usually a form from the bankruptcy court, which the lender will partially fill out with information such as the new interest rate, balance, and payment information.

You or your bankruptcy attorney will also have to fill out several sections in the agreement to demonstrate to the bankruptcy court that you can afford to make the payments. So, if your bankruptcy schedules show that you have a negative monthly income, it is going to be hard to show how you can afford to make the payments (unless you get help from a friend or family member). In fact, your attorney will be asked to certify that the payments will not cause you "undue hardship". 

Why Would You Want to Reaffirm?

As discussed above, a secured creditor can repossess your property (in our example, your car) after you get your bankruptcy discharge if you do not reaffirm the debt. Sometimes, the creditor can file a motion during your bankruptcy case called a Motion to Lift the Motion to Lift the Automatic Stay to get the ball rolling sooner, although we see these motions more often in Chapter 13 cases if you stop making payments for a car or a house you're trying to protect. 

You May Need Bankruptcy Court Approval

Even after you sign the reaffirmation agreement and send it back to the lender, the lender needs to file it with the bankruptcy court before your discharge is entered. Ordinarily, the reaffirmation agreement will not be set for a hearing before the bankruptcy judge. The reaffirmation will be set for a hearing under certain circumstances:

  • You are filing the case pro se (you are not represented by an attorney).
  • Your attorney does not certify that the payment will not cause you "undue hardship".
  • Even though your attorney has certified the reaffirmation, the income and expense information you provided in your bankruptcy schedules or on the reaffirmation form do not support enough disposable income to make the reaffirmation affordable. 

At the hearing, the bankruptcy judge will ask you questions to determine whether you really need the collateral and whether you can afford the payments. 

The agreement is not effective if the court disapproves. Many times, judges may not approve an agreement if the lender does not give you a lower interest rate, a balance reduction, or some other concession. If the judge does not approve the agreement, the agreement has no effect and you might as well rip it up! However, if the judge approves the agreement, the agreement is your new contract with the lender.

Redeeming the Collateral

Another option is to redeem the collateral for its value. The downside of a a redemption is that you usually have to pay the creditor a lump sum. This is an amount you can negotiate with the creditor. You can use your own resources, someone can lend or give you the money, or you can borrow the money from your bank. Some companies even specialize in financing the redemption amount. 

Read more about redemption at How to Redeem Your Car in a Chapter 7 Bankruptcy.


Updated May 2017 by Carron Nicks