Should A Bankrupt Debtor Sign a Reaffirmation Agreement

When an individual files bankruptcy the discharge applies to secured debts, such as home mortgages and car loans, as well as to unsecured loans such as medical or utility bills. In most cases though the lender retains any security interest it has in property after the bankruptcy. Thus if you go bankrupt and fail to make your car payments, the lender can repossess the vehicle, but since the debt was discharged it can not come after you for additional funds, if the sales price on the vehicle is less than the outstanding loan.

Sometimes the debtor wants to keep a house or a car and will continue to make the payments for this reason. In a Chapter 7 bankruptcy the lender and the borrower can enter a reaffirmation agreement, which makes the debt fully enforceable just as if the debtor had never filed the bankruptcy. The debtor in that situation will sometimes ask his bankruptcy lawyer whether signing th reaffirmation agreement is a good idea.

The first point to consider in this situation is whether the lender will insist on the reaffirmation agreement. At least in the case of a loan secured by personal property the lender can require the debtor to sign the reaffirmation agreement as a condition of keeping the property. Most secured lenders though seem happy to accept the payments whether or not there is a reaffirmation agreement and in this case the borrower will still own the property once the loan is paid off.

If it is the debtor’s decision there are several factors to consider before one reaffirms. The big disadvantage of signing the reaffirmation agreement is that, if the debtor fails to keep up the payment the lender can still collect a deficiency after the property is repossessed, if it sells for less than the amount owed. For this reason a bankruptcy court will not even approve the reaffirmation agreement, if the judge believes keeping up the payments will create a hardship. The advantages of signing the reaffirmation agreement are that the lender can then send you monthly statements to help you keep track of when payments are due. Furthermore, if you pay off a secured debt that has been reaffirmed it will show positively on your credit report.

Rescinding Reaffirmation Agreements in Bankruptcy

Although a Chapter 7 Bankruptcy will discharge secured debts such as a home mortgage or a car loan, many debtors are willing to continue making the payments so they can keep the property. In this situation the bankruptcy law allows the debtor and the creditor to enter a reaffirmation agreement, in which the debtor agrees to continue making the payments, and the creditor allows the borrower to retain the property.

At times though debtors, who have become attached to their house or their car, or even in some cases to a boat or a camper, will sign the reaffirmation agreement and later realize that they made a financial mistake.

Homeowners, may be upside down on their mortgage, but will agree to reaffirm, because they like where they are living, and they are still carrying the hope in their hearts that the real estate market will make a comeback, and the house will turn out to be a good investment.

While the debtors do not have an unlimited option to change their mind, the law does allow them a limited window of time to cancel the agreement and still receive a discharge on the debt. The borrower may rescind the reaffirmation agreement within the later of the bankruptcy discharge date or 60 days after the reaffirmation agreement is filed with the court.

To exercise this right the debtor merely has to give notice to the lender within the rescinding period.