Reaffirmation Agreement: What is it and What Are the Pro’s and Con’s of Signing One?

When you file a Chapter 7 bankruptcy case, you also file a statement of intention with respect to property that is secured by consensual liens (car loans, furniture loans etc.). Bankruptcy law requires you to “perform” or move forward with your intentions regarding financed personal property within 45 days of the meeting of creditors, or else the automatic stay terminates and the creditor is no longer prevented from repossessing the collateral.

The options an individual has in dealing with a secured creditor in this situation are as follows:

Surrender: The collateral may be surrendered back to the lender who will sell the property and apply the proceeds to the outstanding balance of your loan. Assuming your case completes and you receive a discharge, any deficiency balance owed on the property will be eliminated in the bankruptcy. This is a good option if you are unsure you will be able to make the payments moving forward, or if the collateral is damaged and you owe more than the property is worth.n nRedeem: Bankruptcy law allows debtors to “redeem,” or buy out personal property secured by liens for the market value of the property rather than what’s owed on it. The downside here is that you must pay the lender the market value in a lump sum which is difficult for most. There are lenders who will finance a loan for the market value of the property, however the interest rates are high and should be factored into the overall net benefit to the debtor.

Reaffirm: This option has legal consequences that should be considered carefully before a decision is made. A reaffirmation agreement is a contract that puts the debtor “back on the hook” for the debt despite the bankruptcy. This is the downside of reaffirming a debt. If you default in the future at any time, the creditor can repossess the collateral AND sue you for any deficiency balance you may owe. It is the rare exception that a debtor should agree to reaffirm a debt, and it is not an option recommended by The Larkin Law Firm absent special circumstances (ie. lower interest rate or principal balance reduction). The only benefit of reaffirming a debt is that the payments made after the debt is reaffirmed are reflected on your credit report to help you begin to reestablish credit. That being said, there are many other things you can do to reestablish credit after a bankruptcy without reaffirming, and this alone should not be the sole consideration in making a decision to reaffirm.

Retain and Pay: Most secured lenders will continue to accept your monthly payments and allow you to keep the collateral even if you haven’t indicated intent to reaffirm your debt. This is known as the “retain and pay” option. It is an informal option not specifically recognized by the Bankruptcy Code. Retain and Pay is an attractive option if the lender will accept it. However, debtor’s choosing this option must be comfortable with a lack of certainty or predictability. Some lenders like Ford Motor Credit, GMAC and Daimler Chrysler state they will repossess vehicles unless the debt is timely reaffirmed. Other lenders like Toyota typically feel that it is better to receive monthly payments under the informal “retain and pay” option rather than lose money by selling repossessed vehicles at auction prices. It is possible, however, that you think your lender has decided to continue to accept your payments only to wake up one morning and find your vehicle gone. Additionally, if you choose the “retain and pay” option, your billing statements will likely stop being sent to you, because from a legal standpoint, the debt has been discharged and creditors are not supposed to bill you for debts that have been discharged in bankruptcy. Some lenders will resume billing statements provided you send them a request in writing.

The bottom line in choosing which option is best for you is to make sure you understand all of them. It is imperative that you speak with a qualified attorney before deciding how to proceed.