Bankruptcy and You: Recognizing Reaffirmation Agreements for What They Are

Published Wednesday, August 11, 2010 @ 9:22 am

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If you are considering bankruptcy or are already bankruptcy bound, you likely understand some of what there is to know about the benefits of a bankruptcy filing, including the ability to discharge certain types of debt. What may be lesser well-known in the bankruptcy process is the need (or not) for reaffirmation agreements and their relationship with your debt, collateral and holding on to (or restoring) much-needed property.

In essence, a reaffirmation agreement is a voluntary contract between you and your creditor that promises you will pay all or a part of a debt that would otherwise be discharged in your bankruptcy. Despite the bankruptcy filing, you, the debtor, reaffirm certain debts, and in return, a creditor promises that, as long as your payments are made on time, they will not repossess certain property secured by the prior reaffirmation. In short, any debt that is reaffirmed is not eliminated in the bankruptcy filing, but rather voluntarily paid back by an agreeable debtor.

Understanding that bankruptcy is a means to remove unwanted debt to get you back on a path to a better financial future, you might be wondering, “why in the world would I want to agree to reaffirm my debts with any of my creditors?”

Here are a few reasons reaffirmations may be appealing to even the most beleaguered borrowers:

(1)    Holding on to Collateral that Secures Your Debt
If your creditor included language in the contract that declares you to be in default upon the filing of a bankruptcy, you may need a reaffirmation agreement to prevent repossession. An experienced bankruptcy attorney will look for this language in your contract before it is present to ensure that a reaffirmation agreement is really needed.

(2)   Keeping Existing Credit
In some cases, creditors may be more likely to extend credit to a debtor who agrees to reaffirm a portion of their existing debt. A downside of accepting this new credit is that the reaffirmation amount essentially becomes a service charge for receiving a new opportunity to pay for an expensive loan. In addition, it’s important to remember that getting new credit following your bankruptcy isn’t that difficult in the first place. As a result, this particular justification is rarely recommended as a reason to reaffirm an existing debt.

(3) A Lender seeking Reaffirmation May Offer Better Terms Than your Original Contract
Sometimes, in seeking a reaffirmation, a lender may reduce your interest rate and/or monthly payment. Especially if your lender has included the bankruptcy default language in the contract, it may be a good idea to accept the better terms.