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Bankruptcy Lawyer’s Advice on Reaffirmation Agreements

What is a Reaffirmation Agreement?

There are two documents which protect a secured creditor.  Both are very powerful.  One is a security agreement where you pledge property (house or car) as collateral.  The other is a promissory note that makes you personally liable for the loan.  If you later default, the creditor can then go after the property AND you.

If you file a Chapter 7 bankruptcy, however, the promissory note is destroyed.  Great news for you, but not so great for the lender.  If you stop making payments, the creditor’s only recourse is to take back the property.  You can’t be sued for the debt!

As you decide whether to keep the property, the lender often becomes nervous and prepares what is called a reaffirmation agreement.  Such an agreement is a new contract where you forfeit bankruptcy protection and the lender agrees not to repossess the property if you stay current.  This new agreement then replaces the original promissory note that was destroyed in your Chapter 7 bankruptcy filing.

If a reaffirmation agreement allows you to keep your property in exchange for a promise to repay, who would have a problem with this?  Answer: most experienced Chapter 7 bankruptcy attorneys.

Three Reasons Why I Don’t Like Reaffirmation Agreements

  1. INSTANT LIABILITY:  A reaffirmation agreement binds you in contract.  Future missed payments could ruin your new credit, cause you to lose the property, and make you responsible for the balance of the loan.
  2. LAWYER APPROVAL:  Your lawyer must examine all the circumstances and only sign the reaffirmation agreement if he feels it would not impose an undue hardship on you and your family.  He must look into his crystal ball and determine if you are in a good position to repay the debt.  Here is the problem.  When a Chapter 7 bankruptcy debtor files for bankruptcy relief, I’m convinced that signing a reaffirmation agreement DOES impose undue hardship.
  3. COURT APPROVAL:  Usually, the reaffirmation agreement is not accepted until the US Bankruptcy Court approves the terms.  In other words, bankruptcy courts aren’t thrilled to let you resume personal liability when you’ve already shown that your expenses exceed your post-bankruptcy income.

Tips To Consider When Signing A Reaffirmation Agreement

  1. Can you restructure the payment terms to be more favorable?  Try to reduce the principal and interest, or stretch out the payment length.
  2. You have 60 days to change your mind.
  3. Is it really necessary to sign the agreement?  In Rhode Island, most secured creditors are willing to let you keep making payments without signing a reaffirmation agreement.  Chapter 7 Bankruptcy lawyers ofter refer to this as the KEEP and PAY option.

Bottom line, a qualified Chapter 7 bankruptcy lawyer can help you protect your property without giving up important bankruptcy protection.  Signing a reaffirmation agreement is usually unwise.

About Mark Buckley

Consumer Bankruptcy, Estate Planning, and debt-settlement attorney licensed in RI & MA. I am the only bankruptcy lawyer who is a certified financial planner professional. 

To plan your estate, or resolve debt concerns, call me at (401) 467-6800.