Positives and Negatives of Reaffirmation Agreements

September 25, 2013

Whether or not it is a good idea to do a reaffirmation agreement is a question that can be quite difficult for Chapter 7 debtors to answer; it is also a question that there is not really a “right” answer to. Attorneys are often asked “what should I do!?” All an attorney can do is really inform the debtors of the pros and cons of entering into a reaffirmation agreement; not if it’s a good idea for the client. Below is a discussion of the pros and cons of entering into a reaffirmation agreement and a basic explanation of the process:

For starters, what is a reaffirmation agreement? A reaffirmation agreement is an agreement between a debtor and creditor that the debt owed to the creditor will not be affected by the bankruptcy. Anytime a debtor files for Chapter 7 bankruptcy protection, their personal liability on secured debts like a mortgage or car note is automatically erased. It is important to emphasize that it is only their personal liability that goes away. What this means, is that the debtor can no longer be sued for not paying for their house, car, etc. However, the creditor (the mortgage company or car note company) can still repossess or foreclose on property that is not being paid for. Here’s a common example to make this concept a little easier: Dave is in the process of buying a truck. The truck is worth $10,000 and Dave owes $15,000 on it. Dave files for bankruptcy. At this point, if Dave stops paying on the truck, all the creditor can do is repossess it, they can’t sue Dave for the $5,000 difference between what the car is worth and what is owed on it. But they CAN pick it up. It’s always important to remember that there’s no such thing as a free lunch.

So what does a reaffirmation agreement actually do? A reaffirmation is a contract that is filed with the bankruptcy court that makes a debtor personally liable on the contract again, meaning they can get sued if they default on the agreement, in addition to repossession/foreclosure. So why on earth would someone want to reaffirm a debt? For a few reasons: The first reason is the most obvious, the creditor is going to require it in order for the debtor to keep the collateral. This happens most frequently with cars and consumer electronics because they are two types of collateral whose value depreciates rapidly (under Texas law it is not necessary to reaffirm a mortgage to keep your house).
The next reason is so that a debtor can continue to have their monthly payments reported to the credit bureau to have those payments help rebuild a debtor’s credit score. If a reaffirmation agreement is not entered into, the debt will no longer be able to be reported to the credit bureaus.
The third reason is that very recently, banks have started making it more difficult for people to refinance their loans if the debtor did not sign a reaffirmation agreement in their bankruptcy. This has nothing to do with law; this is just something banks are starting to enforce.

If you are confused about bankruptcy and/or the reaffirmation process, contact the experienced bankruptcy attorneys at the Fears Nachawati Law Firm by clicking here, or dialing our office at 1.866.705.7584 for a free consultation.

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