Reaffirmation Agreements In Bankruptcy: Should I Sign And What Happens If I Don’t?

Close up of female hand writing on paper with ink penOne of the most persistent questions which arises in a Chapter 7 bankruptcy is what to with secured creditors whose debts are secured by the debtor’s property.  In such cases, the secured creditor is likely to pressure the Chapter 7 debtor into signing a “reaffirmation agreement.”  It is easy to understand why the secured creditors wants the reaffirmation agreement to be signed, it places all of the benefit on the creditor and all of the risk on the debtor who signs it.  If you sign a reaffirmation agreement and then default, you have the worst possible outcome, you lose the property securing the debt and the creditor can also sue you for the unpaid balance of the debt.  In other words, it is as if there was no bankruptcy filed, all protection has been removed.

If you are asked to sign a reaffirmation, please review it carefully with your attorney.  Although the perception exists that a “simple” Chapter 7 can be done without an attorney, the reaffirmation agreement is just one of the many bumps in the road that can result in harm to the consumer.  And don’t let anyone tell you that signing a reaffirmation is necessary to “rebuild” your credit, that just is not so.

Some lenders have an established reputation for requiring a reaffirmation agreement.  If the consumer does not sign, then the creditor will automatically repossess the property securing a debt.  If that property is, for example, the debtor’s automobile, then imagine the shock of the debtor who wakes up one morning to go to work, only to find that their car is no longer in the driveway where it was left the night before.  In those cases, the consumer has little choice, and an experienced lawyer is planning for getting the reaffirmation agreement approved from the first day they are retained as counsel.

Other lenders allow a “keep and pay” option.  Although strictly speaking the amendments to the bankruptcy code which went into effect in 2005 eliminated the keep and pay option, as a practical matter, this is the option which has the greatest benefit to the consumer.  In this option, the consumer keeps the property and keeps making the payment without signing the reaffirmation agreement.  That way, should the day come when the debtor cannot or does not want to make the monthly payment, they can walk away from the debt.  The creditor can still enforce their property rights by repossession of the collateral, but they can’t sue the consumer because no reaffirmation agreement was signed.

Reaffirmation of debt only applies to “personal” property, like automobiles.  It does not apply to real estate.  Reaffirmation of a mortgage debt should only be done with the advice of counsel.  In a future post, I will discuss in detail your rights to have an accurate credit report, reaffirmation agreement or no.  In the meantime, if you are facing financial difficulties, call me at 216-642-8234 and we can review bankruptcy options and whether they make sense for you.  This post as always is for general discussion purposes, and does not constitute legal advice.

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