Should I reaffirm my loan in bankruptcy?
Updated: Oct 21, 2020
What is a reaffirmation agreement? When you file a Chapter 7 bankruptcy case, upon discharge, your legal obligation to pay any debts in your name (besides certain exceptions) is gone. This includes mortgages and car loans. While this may sound alarming, it's important to remember that it is very rare for someone to lose an asset they are making payments on that they want to protect in a bankruptcy, assuming they have a good bankruptcy attorney. I explain this to clients as all debts going into a pile when you file your case and, in order to take a debt out of this pile, you need to sign a reaffirmation agreement to reinstate the loan. A reaffirmation "reaffirms" your legal obligation to pay a debt to a creditor in a Chapter 7 bankruptcy, these do not exist in Chapter 13 bankruptcy cases. It involves signing a new agreement that is then filed with the Court stating the terms of the loan and interest rate. This agreement acts as a new loan document.
What kinds of debts can be reaffirmed? Debts that can be reaffirmed are usually car loans or mortgage loans. You cannot reaffirm credit cards or other unsecured debts.
Is a reaffirmation agreement required? No. You are NOT required to sign a reaffirmation agreement and whether this is in your best interests is something you should question! If you do not believe the vehicle you have will last until the end of the loan term or that you may not be able to make the payments, you should NOT reaffirm the loan! A bankruptcy discharges your obligation to pay the debt.
Will I lose my car or house without a reaffirmation agreement? Not necessarily, this will be up to the individual creditor. In my experience, most creditors just want you to pay back the money you have borrowed, so if you are current on your payments, they will usually not take any action. This is generally true for both car and house loans (mortgages), with the notable exception of Ford financing, who do require a reaffirmation agreement.
What is the downside to reaffirming a loan? If your vehicle breaks down after you have reaffirmed that loan, you will still be legally required to pay off the loan deficiency. Depending on the loan amount, this could put some people back into the bad financial position that caused them to file bankruptcy in the first place. Some loans also have very high interest rates or debts that are much higher than the actual value of the vehicle, in those situations, it may make sense to start over and not reaffirm.
What is the upside of reaffirming a loan? One reason to reaffirm a loan may be that the creditor could report the payments you've made on the loan to credit bureaus, which could increase your credit score. If you do not reaffirm, the lender will not report any payments you make to the credit bureaus. Read more about credit scores and how to increase them after bankruptcy here.
Are all reaffirmation agreements approved by the Court? No. The Court will review each reaffirmation agreement and, if the terms of the loan, interest rate, payment amount or amount owed overall do not appear to be in the debtor's best interests, the Court will not approve the agreement. This does NOT mean you can't keep the asset if you make payments, it just means that the underlying debt is not enforceable.
My recommendations? As a bankruptcy attorney practicing in the Western District of Michigan, I usually do not encourage reaffirmation agreements to my clients. The flexibility of being able to turn that vehicle in should it break down or should the payments become too much to handle is a great option to have, especially without any negative consequences to your future credit or a potential deficiency balance looming. Our local Courts usually require an additional hearing be held on reaffirmation agreements. Once your bankruptcy case is over, you may qualify for a better deal on a new auto loan.
Can I change my mind after signing? You have the right to rescind (cancel) your signing of a reaffirmation agreement up to sixty (60) days from your signing the agreement. To rescind, you must let your attorney know at least one (1) week ahead of the deadline in writing.
Attorney Allison Greenlee Korr handles cases in Kalamazoo, Battle Creek and all surrounding counties, call today for a consultation.269-381-4471