What is a reaffirmation agreement?
A reaffirmation agreement is used in Chapter 7 bankruptcy cases when the person filing for bankruptcy wants to continue paying one or more of their debts. This is typically used for secured debts such as auto loans or home loans, where the person might want to keep the property.
In a Chapter 7 bankruptcy case, once the case is complete, all of your debts are typically wiped out. However, if you’re buying your home, you may want to keep it, which means you’ll need to formally agree to continue paying the mortgage. Otherwise, that debt will be wiped out, too.
If that happens, the bank likely would take your home to pay for its loss. To avoid this, you can file a reaffirmation agreement, which states that you will continue paying the loan just as though you had never filed for bankruptcy.
However, just because you decide to reaffirm the debt doesn’t mean you can. Typically, you can only reaffirm a debt if it’s considered exempt. If it’s not, the trustee may require you to sell the property to help pay back some or all of your debts.
Also, the bankruptcy judge may not allow you to reaffirm the debt, for example if he or she determines that you likely will not be able to keep up with the payments or if you owe significantly more than what the property is worth.
Reaffirmation agreement example
If you have a home, you may want to keep it after filing bankruptcy, especially since getting any kind of loan is more difficult once you’ve gone bankrupt. If the court allows the agreement, it will be like you never filed bankruptcy regarding that debt, and you’ll still owe the full amount.
Because you won’t be able to file bankruptcy again for several years, you must stay current on the debt or the lender could repossess the home and sell it to recoup what you owe. If the proceeds from the sale are less than what you owe, the lender could take you to court for the remaining amount.