Should You Sign A Reaffirmation Agreement

Keep Property Without Signing Reaffirmation Agreement
When you file a chapter 7 bankruptcy, you will have the option of reaffirming your secured debts.  The most common reaffirmation is done on a car loan.  Many of my clients have questions about reaffirmation agreements; and whether it is in their best interests to sign a reaffirmation agreement.
What Is A Reaffirmation Agreement?
A reaffirmation agreement takes the debt out of the bankruptcy.  When you reaffirm a debt you are saying that even though the debt is discharged, you agree to treat the debt like it was never part of your bankruptcy.  This can have some serious consequences for you, but it also has some pretty good benefits.
You can only reaffirm secured debts.  This is because secured debts are treated differently in bankruptcy.  When a debt is secured, there are actually two parts to the claim that goes into the bankruptcy: 1) your personal liability on the contract, and 2) the creditor’s security interest in the collateral.  A security interest in collateral is the right to repossess or seize property in the event of default, i.e. repossession or foreclosure.
This means that if you want to keep property that is covered by a security interest, you have to keep paying the secured claim.  The secured creditor is only allowed to get the value of their interest, which is equivalent to the balance due on the contract.  So basically, when you have a secured debt in bankruptcy and you want to keep the property, you have to keep paying even though the actual “debt” was discharged in bankruptcy.
You don’t have to sign a reaffirmation agreement to keep secured property.  For example, you can keep your car if you don’t sign a reaffirmation agreement.  However, there are reasons you might want to sign a reaffirmation agreement.
If Your Reaffirm A Debt
If you reaffirm a debt and then default on that debt, the creditor can repossess the collateral, sell it at auction, and hold you liable for any deficiency.  A deficiency is the difference between the amount you owe and the amount they get at auction.  For example, if you owe $14,000 and the collateral sells at auction for $6,000, then you are personally liable for an $8,000 deficiency.
If you reaffirm a debt, then the creditor will usually start reporting your payment history to the credit bureaus.  If you are able to stay current on the payments, then this will help you rebuild your credit.  Of course, if you miss payments it will hurt your credit.
If you reaffirm a debt, the creditor may only repossess the collateral if you default on the loan.
If You Do Not Reaffirm A Debt
If you do not reaffirm a debt and the creditor repossesses the collateral, they cannot hold you liable for the deficiency.  This is because the debt was discharged in bankruptcy and was never reaffirmed.
If you do not sign a reaffirmation agreement, making on time payments will not help your credit score.  However, late payments will not hurt your credit score.  This is because the lenders will not report payment history on accounts, unless there is a signed reaffirmation agreement.
There is some risk if you decide not to file a reaffirmation agreement on a personal property loan, most commonly a car.  The Bankruptcy Code says that if the debtor does not sign a reaffirmation agreement on personal property, the secured creditor may repossess their collateral at any time, regardless of payment history.
So in theory, you could make all of your car payments on time and they could repossess your car right before it was paid off.  In practice, I have never actually heard of this happening.  If you do not sign a reaffirmation agreement and you remain current on your payments, it is unlikely that you will have to worry about your car being repossessed.  Even though the law allows it, it is unlikely.  This is because car lenders don’t want cars, they want car payments.
You do not have to sign a reaffirmation agreement on mortgages or home equity lines of credit.  This is because Washington State foreclosure law prevents a lender from foreclosing on a loan that is not in default.  Additionally, it is – in my opinion – a bad idea to reaffirm a mortgage because you are increasing the risk that you will be held personally liable for a very large debt.  As long as you do not default on your mortgage, you can keep your house.
Conclusion
If you have a car loan, or other personal property loan, that needs to be reaffirmed, then you should carefully weigh the pros and cons of signing the reaffirmation agreement.  You can keep your car if you do not sign a reaffirmation agreement.  You can also decide to sign a reaffirmation agreement.  There is risk both ways.  I can help you evaluate that risk and help you decide whether a reaffirmation agreement is right for you.