What is a Reaffirmation Agreement?

When going through bankruptcy, signing a reaffirmation agreement can help you retain certain assets when you commit to paying off the debt. In most cases, people sign these agreements to protect their home or car. The hard part is that you’ll still have some debt even though you’ve completed bankruptcy proceedings. While it’s a great tool to protect assets, make sure you know what you’re signing before entering the agreement for the best results.

Understanding the Basics of Reaffirmation Agreement

During bankruptcy, your goal is to discharge some or all debt to get back on firm financial footing. Generally, people file for bankruptcy when they are in too deep and their debt is making it impossible to care for daily needs and is insurmountable. 

But in some cases, you want to reaffirm certain debts by agreeing to repay what you owe in exchange for keeping the asset. This is known as a reaffirmation agreement.

A common example of reaffirmation agreements at work is when a person filing for bankruptcy opts to keep their car. This essential element of how you get to and from work and the grocery store will help you thrive once you complete the bankruptcy process. When you reaffirm that debt, you’ll have the tools you need to live or care for dependents. 

This voluntary, legally binding agreement offers the opportunity to keep certain parts of your debt while others are discharged. Within the agreement, you’ll find many crucial details.

• Amount of debt you are reaffirming
• Repayment terms
• The debt’s annual percentage rate
• Collateral details (such as the car’s make, model and value)

How Reaffirmation Agreements Work

Reaffirmation in bankruptcy takes place within 60 days of the first meeting of creditors. You’ll need to submit the agreement and await the creditor’s acceptance. While that’s a crucial first step, the court must also approve the reaffirmation, which doesn’t happen until you’re approved for debt discharge.

You can get out of these agreements within 60 days of filing for the reaffirmation or 60 days after your debt is discharged, whichever date is later. However, it’s still a serious agreement you should consider carefully whether it’s the right move for you based on your income and any debt that is not eligible for discharge in bankruptcy, such as student loans or taxes.

If everyone agrees to the reaffirmation, you’ll have the chance to keep the collateral and avoid repossession or foreclosure. In some cases, this helps you retain some credit despite going through the bankruptcy process and can help you maintain some sense of normalcy after the large disruption and change bankruptcy can cause.

On the flip side, keeping the debt can reduce the bankruptcy filing’s effectiveness. There is a limit on the number of times you can file for bankruptcy in your lifetime, meaning you should be fairly certain you can pay the reaffirmed loan to avoid the process in the future.

Pros and Cons of Signing a Reaffirmation Agreement

Because this is a legally binding agreement, take some time to review what you’re committing to and the pros and cons of moving forward with retaining the debt.

Pros

• Helps keep crucial collateral
• Can preserve your credit score to some degree
• Might make it easier to get future lines of credit once you’re eligible
• Some creditors offer better interest rates if you sign a reaffirmation agreement

Cons

• It could lead to getting in over your head financially again, which is what you’re working to avoid by discharging your debts.
• You could face deficiency judgments later or still lose your home to foreclosure without getting any financial compensation for the payments you’ve made between now and then

Factors to Consider Before Signing a Reaffirmation Agreement

For those going through bankruptcy, the chance to maintain some semblance of normalcy and comfort is quite attractive. But before you agree to retain your home, vehicle or other asset through a reaffirmation agreement, consider these factors that can help determine if the agreement is right for you.

1. Can you afford the payments? Be honest and realistic about the payments based on your current household income. Build a budget to see whether the debt is reasonable for you to take on.
2. How much equity is in the asset? Perhaps you’ve been paying on your home loan for 20 years and don’t want to lose the equity you’ve built in the home. Or you might be a third of the way through your car payments and you owe less than what the car is worth, making it a sound financial decision.
3. What is the asset worth? While it might have sentimental value to you, try to ignore that fact for a moment and assess its value honestly. Perhaps you’re in a home in a market that saw a downturn, and you now owe more than it is worth. Or you might have taken a second mortgage when things got tough and you’re upside down on payments. Maybe the interest on your car loan is so much that it now exceeds the car’s value. This is your chance to leave this bad debt behind and start new, but you have to be realistic about the asset’s value versus the payments you’ll be making on it.
4. How disruptive will it be to lose the asset? If you’re looking at your only car, you might consider retaining the loan. That way, you can still get to work and begin rebuilding your financial future. It will be challenging to make large purchases for the next several years as you go through the bankruptcy process and rebuilding your credit. Reaffirming the debt might make the most practical sense to help you maintain your way of life.

How to Request a Reaffirmation Agreement

Now that you know what is a reaffirmation agreement, you’re ready to take steps to retain your collateral. Here’s what you need to do.

1. File for bankruptcy.
2. Work with your attorney to draft and negotiate a reaffirmation agreement.
3. Submit a statement of intent with the court and the lender.
4. Attend the reaffirmation hearing where the judge will review it.
5. Once you and the lender reach an agreement, you’ll both sign it.
6. The courts file the agreement.

Your Tool for Retaining Assets During Bankruptcy Proceedings

A reaffirmation agreement is a tool during bankruptcy proceedings that can help you retain certain assets that would be too disruptive to lose. If you use the tool wisely, it can help you get back to a place of financial security and stability faster and with less disruption to your daily life.

Frequently Asked Questions