Just what is the reaffirming of a debt in your bankruptcy?

A person files a bankruptcy with the idea of getting rid of all of their unsecured debt. However, a person has the option of reaffirming a debt or entering into what is known as a reaffirmation agreement. The consequence of reaffirming a debt is that the debt is no longer wiped out by the bankruptcy and that the debtor will remain legally obligated on the debt despite the bankruptcy filing. Since you remain legally obligated on the debt, that means that you could continue to receive collection calls or be sued in court and possibly have your property attached if you fall behind on your payments. Also, if the debtor reaffirms a debt that does not bar the discharge of that debt in a subsequent bankruptcy case. That being the case, it is seldom a good idea to reaffirm a debt. There still can be legitimate reasons why a person might want to reaffirm a debt: 1) to keep collateral that secures a debt (There could be times where a person falls behind on payments on a secured debt and the debtor does not want to pursue or convert their case to a Chapter 13 Bankruptcy. In exchange for signing a reaffirmation agreement, the creditor may agree to a payment plan on the delinquent portion of the debt and agree not to pursue collection activities, such as repossession), 2) maintain credit privileges or to improve your credit record (The creditor will most likely no longer provide a person with payment coupons, any statements related to the account or continue reporting any payments to the credit bureau if the debt has not been reaffirmed).


Reaffirmation Agreements play a role in Chapter 7 Bankruptcies, but are not a part of Chapter 13. The primary focus is on consumer debts or automobile loans secured on your vehicle. The Bankruptcy Code was amended back in 2005. One of the changes was that if a debtor did not sign a reaffirmation agreement, then the lender would get an automatic relief from stay and could repossess the vehicle. The creditor very seldom pursued this option. Every case was looked at on an individual basis. Such things as the year and the value of the car were considered. In any event, state law oftentimes protected a person's car from repossession, as long as the person was current on the payments. Signing a reaffirmation agreement or reaffirming the debt on your car can be a good thing if you can afford to make the payments. This can be a good way of rebuilding your credit and maintaining a good relationship with that particular lender should you want to purchase another car through them. If you are not able to make the payments or making the payments puts you in a difficult situation, then signing a reaffirmation agreement is probably not a good idea, as it can pose a major danger or risk. This debt is no longer discharged in your bankuptcy and should the creditor repossess the vehicle, then you can be held liable for the difference or deficinecy that remains on the debt after the sale of the vehicle. If you find yourself in this situation, then simply continuing to make the regular monthly payments on the debt, better known as the ride through is probably the best option for you. Even though you are not able to use entering into a reaffirmation agreement as a way to re-build your credit, you are still able to keep and use your car.  


The Bankruptcy Code requires reaffirmation agreements to comply with certain terms in order to be in compliance:

     1) must be in writing (The agreement is essentially a contract. You are basically entering into a new contract, so you coud try to negotiate a lower payment or interest rate and even a reduction in the total amount of the debt that you owe. Some creditors may be receptive to new terms and others may not, but it is worth trying), and 

     2) entered into prior to discharge (The agreement must be entered into before the discharge order is entered. If you are in the process of negotiating a reaffirmation agreement and you are afraid that the discharge order may be entered rather soon, then the Bankruptcy Code allows you to file a motion to delay the entry of the discharge order so that you may finish the negotiations of your reaffirmation agreement), and

     3) must contain certain "clear and conspicious" statements (a. Under certain circumstances a reaffirmation agreement can be a good idea, but entering into a reaffirmation agreement is not required. Never let a creditor make you feel that you are required to enter into a reaffirmation agreement, and b.  If you entered into a reaffirmation agreement and later change your mind, you have a right to rescind. You can cancel the agreement anytime prior to discharge or within 60 days after it is filed with the court, whichever is later. However, you must notify the creditor in writing of your intention to cancel, and   

     4) filed with the court (The agreement must be filed with the court and the 60 day time period to rescind does not begin to run until the agreement is filed with the court), and   

     5) attorney declaration or court approval (The attorney must file a declaration stating that the reaffirmation agreement is a fully informed and voluntary agreement that does not impose an undue hardship on the debtor. If the debtor's budget shows that he or she does not have sufficient income to make the payments, then a presumption of undue hardship arises. The attorney is then required to certify that despite the debtor's income situation that they are able to make the payments. In situations in which a presumption of undue hardship arises, the court must review any reaffirmation agreement. The court may only approve a reaffirmation agreement if it is convinced that the agreement does not impose an undue hardship and that it is in the best interest of the debtor. The court will schedule a discharge hearing to advise the debtor of his or her rights. It will again stress that reaffirmation is not required, the right of rescission and the potentional consequences of reaffirming a debt.

There are two other points worth mentioning regarding reaffirmation agreements: 1) The debtor is required to seek court approval on any consumer debt that is not secured by real property. Otherwords, entering into a reaffirmation agreement on your mortgage or any other debt that is secured on real property does not require court approval, and 2) The court is required to approve any reaffirmation agreement on a consumer debt where a presumption of undue hardship arises, except in the case of a credit union. Otherwords, if you car loan is through a credit union it does not matter if a presumption of undue hardship arises.

If you are interested in filing for bankruptcy or have additional questions about your options, then call Pittsburgh Bankruptcy Attorney Rodney Shepherd at 412 471-9670 or fill out our content information form and you will be immediately contacted today to schedule a free consultation.