- 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. When you sign the reaffirmation agreement (i.e. reaffirm), you are signing back on the hook for the secured note. You are assuming all liability for the amount you reaffirm if you ever default on that note. Your bankruptcy will not absolve you of liability for debt that you reaffirm if your car is later repossessed or your house is foreclosed upon and a balance remains due on the debt after the proceeds of the sale are applied to your account.
- 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. No one from our office is going to encourage you to reaffirm. Although your secured creditors get the automatic right to repossess or foreclose on your property if you choose not to reaffirm, as long as you are current on your payments, it is unlikely to happen. 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. Although creditors sometimes threaten that they have the right to repossess or foreclose if you do not reaffirm, the law is unclear on this issue. We can tell you that we have never seen a creditor repossess or foreclose in a case in which the car or house payments were current.
- 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. If you do not sign the reaffirmation agreement, your payments will not be reported to the credit reporting agencies. 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. As stated above, the law is unclear on whether they can repossess or foreclose if no reaffirmation is done but the payments remain current, and we have never seen a creditor try. However, some people want to avoid any risk of this occurring, and they will sign a reaffirmation just to avoid this risk, however small it is.
- 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. If you sign the reaffirmation agreement, you will be liable for any such remaining deficiency. If you did not sign the reaffirmation agreement, you would not be liable for any deficiency. Reaffirmations are very serious agreements. If you are unsure of whether you can make your payment for the full life of the note, you should definitely NOT reaffirm.
- 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.
If you would like additional information about the reaffirmation agreements, feel free to contact W M Law at 913-422-0909 to speak with one of our bankruptcy attorneys. We have 3 different law offices in Kansas City specialized in Bankruptcy. We are located in Olathe, Independence and North Kansas City. Our initial consultation with an attorney is completely free of charge. We will be happy to speak to you. After all, we are here to help.