What does it mean to reaffirm a debt? When you file for bankruptcy, you break every contract you have with all of your creditors, including your secured lenders (your mortgage lender, your car lender – any debt that is secured by a piece of property). A reaffirmation agreement is a way for the lender to say, “We know you broke your contract with us, but since you want to keep your property, why don’t we just sign a new agreement?” These agreements are usually according to the same terms as the old agreement, but it is your responsibility to verify that when you sign the agreement.
Do I have to reaffirm?
Absolutely NOT. Reaffirming is a completely voluntary action on your part. It is completely to the creditor’s advantage and not necessarily to your advantage. No one is going to make you reaffirm. Creditors don’t typically repossess or foreclose on property simply because you don’t reaffirm. They will repossess or foreclose if you do not remain current on your payments, even if you have reaffirmed the debt.
What are the benefits of reaffirming?
One benefit to reaffirming is that it will help you rebuild your credit if you are servicing your note on time after the bankruptcy is completed. Every time you make a payment on time, it will reflect positively on your credit score and help you rebuild your credit. The other benefit is that it takes away the position that creditors sometimes take that they have the right to repossess or foreclose simply because no reaffirmation has been done.
What are the disadvantages of reaffirming?
The biggest disadvantage to signing the reaffirmation agreement is that it forces you to assume all liability on the note you reaffirm. If you default on your payments at any point in the future – one month after the agreement is signed or one year after the agreement is signed – you will remain liable for the full amount of the debt. If the property is taken by the creditor and sold, there is a good chance that the sale price and costs of the sale will be less than the amount owed on the debt, especially with automobile loans.
Can you give me an example?
Let’s say you have a car that’s only worth $10,000, but you have a $15,000 car loan. If you sign the reaffirmation agreement assuming liability for the $15,000 note, every time you make your car payment on time, you will help rebuild your credit. But, let’s assume that you default on your car note 6 months after the bankruptcy is completed. The car can be repossessed, even though you signed the reaffirmation agreement. Let’s then assume it is sold at auction for $10,000. You will remain liable for the remaining $5,000 on the note that was not satisfied after the car was sold.
If you did not sign the reaffirmation agreement, but continued to pay the car note on time, you would not have been rebuilding your credit. Almost certainly, the car lender would not repossess your car as long as you are current on the payments (again, we’ve never, ever seen it happen). Then, if you fail to make payments on your car note and the car is repossessed, you will not remain liable for the $5,000 deficiency as described above. So, reaffirming the debt allows you to keep your car and rebuild your credit, but puts you back on the hook for the note. Not reaffirming still allows you to keep your car and eliminate the risk of being liable for a deficiency if it is repossessed, but it doesn’t help rebuild your credit.
Please contact W M Law with any/all questions you may have about Bankruptcy. We offer a complimentary consultation with an attorney and have three conveniently located offices in the Kansas City area — Olathe, Independence and Northland. Call 913-422-0909 to set up your appointment.