A Reaffirmation agreement protects the secured creditor after you file your bankruptcy. Before filing bankruptcy, there are two documents which protect a secured creditor. The first is a security agreement where you give a lien (security interest ) in your property. The second is a promissory note that makes you personally liable for the loan. If you do not make payments, the creditor can then go after both you and the property. If the property is sold for less than you owe, the creditor can still collect the difference from you.
When you file a Chapter 7 bankruptcy, the promissory note discharged. If you stop making payments, the creditor’s only alternative is to take back the property. The creditor cannot legally try to collect the balance of the debt from you.
If you decide to keep the property, the lender may request that you sign a reaffirmation agreement. Such an agreement is a new contract where you give up bankruptcy protection and the lender agrees not to repossess the property so long as you continue to make payments. This new agreement replaces the original promissory note that was discharged in your Chapter 7 bankruptcy filing. It is like you never filed bankruptcy as to this creditor.
Four Reasons Why I Don’t Like Reaffirmation Agreements
- INSTANT LIABILITY: A reaffirmation agreement binds you into a new contract. Missed payments can ruin your new credit, cause you to lose the property, and make you responsible for the balance of the loan.
- MORTGAGES; You are not required to sign a reaffirmation agreement for a mortgage secured by real property.
- LAWYER APPROVAL: Your lawyer must examine all the circumstances and only sign the reaffirmation agreement if he feels it would not impose an undue hardship on you and your family. Your attorney must determine if you are in a good position to repay the debt. This is impossible without seeing into the future.
- COURT APPROVAL: If your attorney does not approve and sign off on the reaffirmation agreement you can ask the Court to hold a hearing and approve the reaffirmation agreement. Bankruptcy Judges are reluctant to let you resume personal liability when you’ve already shown that your expenses exceed your post-bankruptcy income.
Tips To Consider When Signing A Reaffirmation Agreement
- Can you restructure the payment terms to be more favorable? Some creditors will reduce the amount of the loan and interest rate in exchange for a reaffirmation agreement. Try to reduce the principal and interest, or stretch out the payment length.
- You have 60 days to change your mind.
- Is it really necessary to sign the agreement? In Colorado, most secured creditors are willing to let you keep making payments without signing a reaffirmation agreement. Chapter 7 Bankruptcy lawyers often refer to this as the KEEP and PAY option. The only exception are certain car fiancé companies.
Bottom line, a qualified Chapter 7 bankruptcy lawyer can help you protect your property without giving up important bankruptcy protection. Signing a reaffirmation agreement is usually not recommended.