What Is a Reaffirmation Agreement?

San Diego Bankruptcy Explains Bankruptcy.

Until someone files a Chapter 7 bankruptcy most people have no idea what a reaffirmation agreement is.  I will do my best to make it as easy as it can be.  However,  at times reaffirmation agreements can have  problems under the new bankruptcy act of October 2005.    A reaffirmation agreement is an agreement between the debtor and the creditor.  The debtor chooses to become legally responsible or in another word obligated again to pay all or portion of a debt which was or would have been discharged in the bankruptcy case.

A reaffirmation agreement must be filed within 60 days after the meeting of creditors date. Reaffirmation agreements are voluntary. Reaffirmation agreement is a completely voluntary agreement of the debtor that is  not required by the Bankruptcy Code, the state or federal law. Prior to the changes in the bankruptcy laws in October 2005, a debtor can voluntarily repay any debt normally without any problems, rather than sign a reaffirmation agreement. However, since October 2005, there is now a valid reason for signing a reaffirmation agreement (at least in regard to motor vehicles).  If you want to make sure you can probably keep your vehicle then an reaffirmations agreement is necessary and the approval of the court is needed.

Also your attorney can certify for their clients that signing a reaffirmation is not a hardship for their client. Depending on your income and your ability to pay the debt the attorney might want to seek the court's approval.  When there is  no attorney acting  on your behalf, the Court usually wants to meet with the debtor to make sure the debtor knows that the reaffirmation is completely voluntary. Also if the judge does not believe that a reaffirmation agreement is in a debtor’s best interest and may not have the ability to pay, the judge may refuse to allow the reaffirmation agreement to be entered as a binding agreement.

Remember under a chapter 7 you got a fresh start but you are now asking to take some of that away.  An reaffirmation agreement takes away the “fresh start” over the item you are reaffirming the debt to.  Because of the changes in the bankruptcy laws attorneys will advise strongly against signing one.   This is probably since the attorney is concerned about your continuing making the payment, due to loss of employment, health condition or other valid reasons.  Even if the debtor signs an agreement, the debtor still has 60 days after the agreement is filed with the court or from the discharge date to change his or her mind. All that is needed needed from the debtor is a letter saying “I don’t want this agreement”. The letter is sent to the court and the creditor.

The changes in the bankruptcy laws of October 2005 have had some effect on how  bankruptcy attorneys look at reaffirmation agreements.  Before the bankruptcy laws were changed, the debtor had  four choices in Chapter 7 when it came to secured debts.  

1.  Redemption (buying the value of the car from the creditor) —  The problem here  requires an actual source of funds and most people are in bankruptcy because they don't have funds. 

2.  Surrender the secured property. (this is giving the secured item back to the creditor). This is a very common way of dealing with many of the chapter 7 secured debts.

3.  Reaffirmation (as discussed above); and

4. “Keep and Pay” - (In the past, as long as the debtor continued  paying for the secured item, the debtor could  keep the secured item).   Since 2005, the status of “keep and pay” is uncertain as that option is NOT  mentioned in the new bankruptcy act (while the other three are specifically stated.   In some states, the debtors have the ability to “keep and pay” rights under state law, but that right is not stated under the bankruptcy law, so each state will determine whether their state still provides for “keep and pay”.