Today I want to talk about reaffirmation agreements because it is a topic that is likely to come up if you are researching your bankruptcy options, and can be confusing.

What Is A Reaffirmation Agreement?

A reaffirmation agreement is a type of agreement that is unique to bankruptcy.  In fact, reaffirmation agreements are generally only used in Chapter 7 bankruptcy.  Put simply, it is an agreement by which you “reaffirm” a debt, or agree to be responsible for a debt after bankruptcy.

Normally, bankruptcy eliminates your personal liability for many debts, such as credit cards, medical bills, payday loans, and even secured debts like car loans and mortgages (this does not mean you can keep your car or house without paying the loan).   When you sign a reaffirmation agreement, however, you are basically saying: “even though my bankruptcy would eliminate my responsibility for this debt, I want to still be responsible for paying it.”  In other words, by signing a reaffirmation agreement, you are reversing the impact of the bankruptcy on a particular debt.  It is important to understand that each reaffirmation agreement is specific to a particular debt.  So, if you have several credit card debts when you file for bankruptcy, and you sign a reaffirmation agreement with respect to one credit card, you are only agreeing to be responsible for that particular credit card after bankruptcy.

What Benefits Does A Reaffirmation Agreement Provide?

Generally, a reaffirmation agreement does not provide any benefit to the person filing for bankruptcy, and therefore in most situations it is against your interest to enter into a reaffirmation agreement.  There are, however, three situations that are exceptions to this general rule.  In these situations, you will want to weigh the benefits of a reaffirmation agreement against its drawbacks, and decide whether it makes sense in your situation.  The assistance of a qualified bankruptcy attorney can be very helpful in making this decision.

–Exception One: Car Loans And Other Personal Property Loans

If you have a car loan or another loan tied to your personal property (e.g. a furniture loan), and you want to keep the car or the personal property after bankruptcy, then a reaffirmation agreement may be necessary.  Many loan agreements will provide that filing for bankruptcy is an “event of default,” meaning that by filing for bankruptcy, you breach the loan agreement.  Such default provisions in loan documents are usually ineffective, but the Bankruptcy Code provides for one exception.  If you have a personal property loan when you file for bankruptcy, and you do not timely enter into a reaffirmation agreement or redeem the property, then the default provision becomes effective again, and the lender can repossess the car or other personal property even if you are current on your payments.  The result is that you can lose your car (or furniture, or other personal property) simply because you filed for bankruptcy, even if you want to keep this property.

You may ask: why would a lender want to take my car (or other property) if I am current on my payments?  Oftentimes the lender will not want your property if you are current on payments, but some lenders will take it anyway in order to force borrowers to enter into reaffirmation agreements.  A reaffirmation agreement, if approved, makes you personally responsible for the debt, so if you were to later stop making payments, the lender could both take the property, and sue you for any deficiency.  Without an approved reaffirmation agreement, the lender can only take back the property, but cannot recover any deficiency from you personally.

So, timely entering into a reaffirmation agreement is one way to prevent a car lender or personal property lender from taking your property if you are current on your payments (and, in case of vehicles, have the property insured), and to allow you to keep the property that you want to keep.  Of course, once you enter into a reaffirmation agreement, and that agreement is approved, then you are personally liable for the debt again.

In some jurisdictions, including in Arizona, you can get the benefit of a reaffirmation agreement without becoming personally liable for the debt.  The bankruptcy courts in Arizona have determined that as long as the debtor signs a reaffirmation agreement, he or she has satisfied the requirements of the statute, and a personal property lender cannot take the personal property simply because the debtor filed for bankruptcy, even if the reaffirmation agreement was not approved.  So, in Arizona, if the only reason you are entering into a reaffirmation agreement is to keep your personal property, then you only need to sign the reaffirmation agreement, but there is no need to get the reaffirmation agreement approved.  In fact, having the reaffirmation agreement approved is probably not in your interest, because it would make you personally liable for the debt.   Of course, if you want to enter into a reaffirmation agreement for a different reason, then approval may still be necessary.

–Exception Two: Loan Payments That You Want Reported to Credit Bureaus

Another reason that a reaffirmation agreement may be useful is if you want the payments you make toward a loan to be reported to the credit bureaus.  This only applies to secured loans.  When you file for bankruptcy, your personal liability for most debt gets eliminated.  This includes secured loans like mortgages, car loans, and other property loans.  Even if you continue making payments on the mortgage or other loan, most lenders will generally not report your payments to the credit bureaus.  This may be an issue if you are trying to reestablish your credit history, because the reporting of regular and timely payments on debt is one of the main ways to increase your credit score.  In order to be able to report your payments to credit bureaus, many lenders will claim that they need you to enter into a reaffirmation agreement, and the reaffirmation agreement needs to be approved.

The question then becomes whether the benefit of having the loan payments reported to credit bureaus outweighs the risk of accepting personal liability for the loan in the event later on you are no longer able to make payments.  The answer to this question is going to be different for every person.  In addition, the answer may be affected by the type of loan at issue and the applicable state law.  For example, in Arizona, a borrower may have limited liability on certain residential mortgages, so entering into a reaffirmation agreement with respect to such a mortgage may carry less risk.

–Exception Three: The Lender Offers to Modify Your Secured Loan

The last exception is where the lender offers you modified loan terms that are beneficial to you.  Again, this applies only to secured loans, because most unsecured debt gets eliminated in bankruptcy, so no matter how good a modification an unsecured creditor offers, it is not going to be better than not having to pay the debt at all.  One example of where this exception applies is where a car lender offer to significantly reduce the interest rate on the loan, or offers to reduce the principal amount of the loan down to the current value of the property.  Signing a reaffirmation agreement in this situation, and getting the reaffirmation agreement approved, may make sense if you are certain that you want to keep the property securing the loan.  Even though you become personally responsible for the debt, the concessions offered by the lender may outweigh the risk of personal liability.  Again, each situation will be different, and you have the pros and cons of reaffirmation for your personally.

Reaffirmation Agreement Procedures

In order to enter into a valid reaffirmation agreement with respect to a secured debt, you have to timely take certain steps.  First, within 30 days of the filing of the bankruptcy, or on or before the date of the meeting of creditors, whichever is earlier, you must file a statement of intention indicating what you want to do with the property.  If your intent is to enter into a reaffirmation agreement, this statement must say so.  Then, within 30 days of the first date of the meeting of creditors, you must perform as indicated on the statement of intention.  If you indicated that you want to reaffirm the debt, this means that you must enter into the reaffirmation agreement within these 30 days.

The above deadlines can be extended by the court for cause.

For a reaffirmation agreement to be effective, some additional requirements must be satisfied.  It must be entered into before you receive your discharge.  You must receive certain disclosures informing you of the significance of a reaffirmation agreement and your rights with respect to a reaffirmation agreement.  The reaffirmation agreement must be filed with the court.  The reaffirmation agreement has to be approved by either your lawyer or the court, and if you do not have a lawyer, then it must be approved by the court.

How Does A Reaffirmation Agreement Get Approved?

A reaffirmation agreement can get approved in one of two ways.  If you have an attorney representing you in the bankruptcy, your attorney can sign a declaration stating that he or she advised you of the effects and consequences of the agreement, that you understand the agreement and are entering into it voluntarily, and that the agreement does not impose an undue hardship on you or your dependents.  If you do not have a lawyer, then the court can approve the reaffirmation agreement if it does not impose an undue hardship on you or your dependents, and if it is in your best interest.  If you have a lawyer and your lawyer does not approve the reaffirmation agreement, the court can only approve the agreement if there is a presumption of undue hardship (meaning generally that your expenses exceed your income), but the court nevertheless concludes that it will not impose an undue hardship and is in your best interest.

Can I Cancel A Reaffirmation Agreement?

Yes, you can cancel a reaffirmation agreement for any reason, or without a reason, at any point prior to the entry of your discharge, or within 60 days of entering into the reaffirmation agreement, whichever is later.

Do You Need Help Deciding If A Reaffirmation Agreement Is In Your Best Interest?  A Yusufov Law Firm Bankruptcy Attorney Can Help

At Yusufov Law Firm PLLC, we can evaluate your secured debt and your finances to determine if a reaffirmation agreement is in your best interests.  To schedule a free consultation, call us at 480-788-0098 in Phoenix/Mesa, or 520-745-4429 in Tucson, or contact us online.

The above is provided for general informational purposes only. It is not intended to and does not constitute legal advice, and does not create an attorney-client relationship. If you need legal advice for your specific situation, you should contact a qualified attorney in your area.