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What is a reaffirmation agreement?

A reaffirmation agreement is an agreement between you and a creditor where you agree that you personally will pay all or a portion of a debt owed, regardless of the bankruptcy. They only apply in a Chapter 7 bankruptcies and are voluntary. They typically come into play with car creditors in your bankruptcy.

Before the bankruptcy, if you did not make your car payment, the car creditor could repossess the car and sell it at an auction. You are liable for any balance owed, or deficiency, after the auction. For example, if you owe $10,000.00 on a car note and the car creditor repossesses the car due to lack of payments, the car creditor may sell it at auction for $2,000.00. In that example, you are still personally liable for the remaining $8,000.00. The car creditor may sue you for the deficiency and must report that deficiency to the IRS on a 1099-C which could cause you to receive a small refund or owe the IRS money when you file your yearly income taxes.

When you file bankruptcy, you must include that car creditor in your bankruptcy. However, the Chapter 7 bankruptcy eliminates your personal liability on the car note. The car itself remains liable on the note but you are not. That means that if you make your car payments, you will keep the car. However, if you are unable to make your car payments, the car creditor will repossess the car, BUT the car creditor may never attempt to collect any deficiency from you. So, in my example above, the car creditor may not pursue you personally for the $8,000.00.

Signing a reaffirmation agreement causes you to remain personally liable for the car. You become liable for the $8,000.00 deficiency in my example above again. It is basically saying I really want this car. I want it so badly that if I don't make the payments, the car creditor may come after me personally for the balance of the loan.

There are advantages and disadvantages to signing a reaffirmation agreement. One advantage is that if you sign, then the car creditor may report your payments to your credit report which can help you reestablish credit after the bankruptcy. Another advantage is that some car creditors may lower the interest rate or balance of the loan as an incentive for you to sign the reaffirmation agreement. However, signing a reaffirmation agreement is serious and has one major disadvantage—you remain liable to the entire car note. If you owe more than the car is worth or have an extremely high interest rate, it may not be in your best interest to sign a reaffirmation agreement.

Your bankruptcy attorney should discuss any reaffirmation agreements with you during your Chapter 7 bankruptcy. Reaffirmation agreements require your bankruptcy attorney's signature in addition to your signature. I have handled numerous bankruptcy cases for my clients from Waco, Temple, Killeen, and the surrounding areas. I can inform you of your rights and obligations with regard to reaffirmation agreements so you can make sound decisions about your financial future.

Every case is different, so it is important to discuss your situation with an experienced bankruptcy attorney who can work with you to help you make your decision. Call 254-633-2876 or email us at [email protected] today to discuss your options.

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