Key takeaways

  • A reaffirmation agreement allows you to retain a specific asset (commonly a house or car) during bankruptcy in exchange for agreeing to pay the outstanding debt.
  • If you would like to request a reaffirmation agreement, you must submit a Statement of Intent to the court and contact the lender to establish terms.
  • Only request a reaffirmation agreement if you are confident you can make timely payments. Failing to do so could result in further damage to your credit.

Making a reaffirmation agreement can be helpful if you want to stay in your home or you need to keep driving your car during a bankruptcy settlement. However, this type of agreement means you are still responsible for some sort of payment on the loan. Make sure you understand exactly how it works and what you will be responsible for, so you don’t end up owing payments you can’t make.

What a reaffirmation is

The purpose of bankruptcy is to discharge some or all of your debts so you no longer have to make payments. But in some cases, you may want to reaffirm a certain debt, agreeing to repay some or all of what you owe instead of requesting to cancel it.

For example, if you have a car loan, including it in your bankruptcy will likely result in losing the vehicle. If you need the car for regular transportation, reaffirming that debt will allow you to hold onto it.

Reaffirmation is typically used in Chapter 7 bankruptcy cases, where the borrower attempts to discharge debts in full instead of agreeing to a restructured repayment plan.

What a reaffirmation agreement is

A reaffirmation agreement is voluntary and legally obligates a borrower to pay some or all of what they owe on a specific account instead of discharging the debt in bankruptcy.

The document contains several pieces of information, including the amount of the debt you’re reaffirming, your repayment terms, the annual percentage rate, details about the collateral (if any) and more.

If you want to file a reaffirmation agreement, you need to do so within 60 days of the first date of the meeting of creditors. Once you submit it, it must be accepted by the creditor. Once that happens, the court won’t approve the agreement until you’re eligible for immediate discharge.

Once you file the agreement with the court, you have 60 days from the filing date or the discharge date — whichever is later — to change your mind and rescind it.

What reaffirmation agreements do

A reaffirmation agreement removes a specific debt from your bankruptcy discharge and legally obligates you to make payments based on the terms of the agreement.

If the debt you have is secured, meaning it uses your home, vehicle or another asset as collateral, and you want to maintain possession of that collateral, a reaffirmation agreement stops you from losing it through repossession or foreclosure. A reaffirmation agreement can also help reduce the damage bankruptcy will have to your credit score.

However, reaffirming a debt can be a big financial commitment and impact your bankruptcy’s effectiveness. Because there are limits on how often you can file bankruptcy, reaffirming a debt you know you won’t be able to keep up with can end up hurting you more in the long run.

Why people get reaffirmation agreements

Filing for bankruptcy means you lose any collateral for which you have any remaining payments. For example, if you have a mortgage that is not completely paid off, the lender can take possession of your house when you file for bankruptcy.

A reaffirmation agreement allows you to agree with a lender to keep your collateral after filing for bankruptcy. Common types of loans you may make a reaffirmation agreement for include home loans, auto loans or any other loan that is attached to significant collateral that you use regularly.

How to request a reaffirmation agreement

If you want to request a reaffirmation agreement, you must do so after filing for bankruptcy but before any collateral is discharged to the lender. You will start by submitting a Statement of Intent to the court, which you must also send to the lender. Typically, a bankruptcy lawyer can help you write and negotiate a reaffirmation agreement.

Once you have a written agreement, there may be a reaffirmation hearing where the judge reviews the agreement. Hearings ensure that everything is in the best interest of both you and the lender. When you and the lender have reached an agreement, both parties will sign documentation, and the agreement is filed with the court.

Consequences for not signing a reaffirmation agreement

Reaffirmation agreements are voluntary, so you’re not required to sign one. It’s unnecessary to have one if you want to voluntarily repay a debt instead of including it in your bankruptcy.

It’s also important to note that reaffirmation agreements can be filed only by the debtor, so you don’t have to worry about a creditor coming to you with an agreement. However, if you choose to discharge a debt instead of reaffirming it or repaying it without a reaffirmation agreement, you may lose the asset that secures your debt, and your credit score will take a bigger hit.

If you do file one and it’s accepted by the court, though, you’ll be legally obligated to make payments based on the terms of the agreement.

Reaffirmation can’t be filed after discharge

Once a discharge order has been entered in your bankruptcy case, you can no longer reaffirm any of the debts included in the discharge agreement. The same applies if your case has been closed by the court.

As a result, it’s important to consider reaffirmation long before the discharge date. Take some time to consider your situation and consider hiring a bankruptcy attorney if you haven’t already to help you with the decision-making process.

Bottom line

If you’re going through bankruptcy, a reaffirmation agreement allows you to agree to pay on certain debts. This process will remove that balance from your discharge, but it can help mitigate the damage of the bankruptcy by allowing you to hold onto the collateral on the loan.

If you are considering a reaffirmation agreement, it’s a good idea to consult a bankruptcy attorney first. An experienced attorney can help you determine if it’s the right fit for you and, if it is, ensure you complete the necessary paperwork correctly.