UNDERSTANDING REAFFIRMATION AGREEMENTS
People who file for bankruptcy often do so to eliminate the obligation to pay certain types of debt and to obtain a “fresh start”. Not all debts are dischargeable, but most common consumer debts are. In certain limited circumstances, you may wish to pay a particular debt even though that debt can be discharged in bankruptcy. Bankruptcy does not prevent a debtor from volunteering to pay a debt that would otherwise be discharged. When you choose to pay such a debt by contract, you must enter into a reaffirmation agreement with a creditor to “reaffirm” your intent to pay.
Special considerations come into play when you decide to enter into a reaffirmation agreement because you will be contractually bound to pay the otherwise discharged debt even if, at some point during the life of the agreement, you are unable to make the payments. Congress was concerned when it passed the bankruptcy code that at times people had been taken advantage of when they signed these types of agreements. The bankruptcy code therefore has certain procedures that apply to protect you.
WHY WOULD YOU ENTER INTO A REAFFRIMATION AGREEMENT?
A creditor to whom you owe a debt can have a “security interest” in your property, such as an automobile, appliance or home that is being purchased by you over time through periodic payments. A security interest protects the creditor if you are unable to repay the debt and may give the creditor the right to take away and sell the property if the required payments are not made. Bankruptcy does not make these security interests in property go away. If you would like to keep the property, you may have to enter into a reaffirmation agreement with the creditor that obligates you to continue making the required payments during and after the bankruptcy case. It is generally not advisable for you to bind yourself to make an otherwise dischargeable debt unless it is necessary to keep the property that is securing it.
Your bankruptcy discharge is yours alone and does not affect anyone else’s obligation on your debts. A reason you may wish to reaffirm a debt is because a co-obligor (someone who cosigned for the debt) or guarantor (someone who is responsible for the debt if you default) may have to satisfy the debt even if you receive a bankruptcy discharge. Under those circumstances, you may choose to reaffirm, even if you do not wish to keep the property securing the debt, so the co-obligor or guarantor does not have to pay. Before reaffirming the debt, you should fully understand the responsibilities of the co-obligor or guarantor and should review the documents that set forth their obligations.
Reaffirmation agreements are strictly voluntary. You are not required to reaffirm any of your debts. If you sign a reaffirmation agreement, you agree to pay a debt that otherwise might be discharged in your bankruptcy case. There may be other ways to renegotiate payments with creditors without entering into a reaffirmation agreement. A creditor cannot make your enter into a reaffirmation agreement.
SHOULD YOU ENTER INTO A REAFFIRMATION AGREEMENT?
Reaffirming a debt imposes ongoing obligations on you to make payments and may have significant financial consequences. You should carefully consider the following questions before entering into a reaffirmation agreement:
• Wants verses needs question.
You may want to keep property that is subject to a security interest but do you really need it? You should only reaffirm debts on things that you really need. Reaffirming debts on items that are not needed may continue the financial problems that caused you to have to file bankruptcy in the first place.
• Can you replace the property that is subject to a security interest for less money?
If yes, you should not reaffirm. You should not enter into a reaffirmation agreement to retain property if you can get adequate replacement property for less money. For example, if a replacement car costs $5,000 at a 5% interest rate and the reaffirmation agreement would require you to pay $6,000 at a 5% interest rate or $5,000 at a 6% interest rate, then you should not enter into the reaffirmation agreement.
• Can you really afford to satisfy the obligation you are seeking to reaffirm?
It is a mistake for you to sign a reaffirmation agreement if you may not be able to make the required payments. Once bound by a reaffirmation agreement, you will be personally reliable for the debt. If you later default, the creditor can obtain a judgment against you personally in addition to repossessing the property securing the debt. For example, if you reaffirm a car loan for $15,000 and the car securing the loan is worth $8,000 then, if you default, the creditor may repossess the car and you will still be liable to the creditor for $7,000.
• Are you behind on payments?
You should make sure that you are able to catch up on any missed payments before you reaffirm a delinquent debt.
• Has the creditor offered you a new deal or better terms? Be careful! New credit, lower interest and/or better payment terms may appear enticing but you still may not be able to afford the ongoing payment obligations.
• Is the creditor able to take away your property?
If a creditor says they can take your property if the debt is not repaid, then you should make sure that the creditor provides documents supporting that statement. The vast majority of reaffirmation agreements are for secured debts (such as a car loan), where the creditor can repossess your property, as opposed to unsecured debts (such as a credit card balance).
• Do you need to enter into a reaffirmation agreement with respect to a loan for real property, if you are current on payments?
The bankruptcy code is clear that you must enter a reaffirmation agreement to retain personal property, such as an automobile or appliance even if you are current on all payments. However, if you are current on your home mortgage, you do not have to reaffirm the debt to retain the home and for the loan to remain in place, instead, the debt can “ride through” your bankruptcy without being reaffirmed. In Minnesota, the creditor cannot repossess your home so long as you maintain the mortgage payments.
• Is a co-obligator or guarantor responsible for satisfying the debt?
If the answer to that question is yes, you may wish to reaffirm the debt so the co-obligator or guarantor does not have to pay. However, if you are the guarantor of a loan and the borrower (non debtor) has the property securing it, you should not have to reaffirm the debt for the borrower to keep the property as long as the borrower is current on the payments. In any event, if you do not care whether the property is repossessed from the borrower, then you should not sign a reaffirmation agreement.
• Should you enter into a reaffirmation agreement just to improve your credit?
No. There are other ways for you to improve your credit, such as by paying bills on time; keeping balances low on credit cards and reducing the number of credit cards that you have open.
• Do banks have to report your payments to the credit agencies if you reaffirm your debt with them?
Many banks will report your payments if you enter into a reaffirmation agreement with them. However some banks like US Bank will not report your payments if you file bankruptcy regardless of you signing a reaffirmation agreement. Additionally banks can change their policies on how they handle bankruptcies at any time. There is no way for a lawyer to predict what a bank is going to do in the future.
MUST YOU ENTER INTO A REAFFIRMATION AGREEMENT?
The law states that you cannot keep personal property that is secured by a loan the proceeds of which you used to purchase that personal property without either reaffirming or redeeming. (Redeeming means that you have an absolute right to keep the property but you must pay the creditor in full the fair market value of the property). There is nothing in the bankruptcy law about any requirement to reaffirm on real property, in fact, in Minnesota a mortgagor cannot foreclose real property if you are current on the mortgage payments.
Some creditors (most notably Ford Motor Credit) take the legal position that if you do not reaffirm they have a right to repossess the collateral even if you are current on your loan payments. Most lenders are not going to repossess their collateral so long as you are current on your payments.
WHAT ARE THE EFFECTS OF ENTERING INTO A REAFFIRMATION AGREEMENT?
When you enter into a reaffirmation agreement, you are obligated to pay the reaffirmed debt. The reaffirmed debt is treated as if you have never filed for bankruptcy. As such, reaffirmation can have significant financial consequences. For example, if you reaffirm a car loan and miss a payment in the future, the creditor may be able to repossess the car and sue you for the balance of the loan. If you are unable to pay the reaffirmed debt, you must wait eight years after filing bankruptcy before you can file again in order to discharge the reaffirmed debt.
Given the significance consequences, you must make sure that you understand the terms of a reaffirmation agreement before signing including (1) the amount that you will owe, (2) the timing of the payments, and (3) any right the creditor may have to take away the property if you fail to make a payment.
WHEN CAN A REAFFIRMATION AGREEMENT BE ENTERED INTO?
A reaffirmation agreement must be entered into before the granting of a discharge and filed with the clerk of the bankruptcy court for it to be valid and binding. Additionally, in Minnesota, a reaffirmation is not valid until it is approved by the residing bankruptcy judge. In some situations the judge will simply approve the reaffirmation agreement once it is filed. In some situations the judge will not approve the reaffirmation agreement. In some situations the judge will approve the reaffirmation agreement only after an appearance by you before the judge.
An executed reaffirmation agreement may be filed by any party, including you or a creditor. It must be filed within sixty days after the first date set for the meeting of creditors in the bankruptcy case unless the deadline is extended by the bankruptcy court. You will receive notice of the date set for the first meeting of creditors.
In Minnesota, reaffirmation agreements are most often drafted and filed by the creditor.
IS AN ATTORNEY NEEDED TO ENTER INTO A REAFFIRMATION AGREEMENT?
While it is always advisable to seek the assistance of an attorney, you do not need an attorney to enter into a reaffirmation agreement. The reaffirmation process is slightly different if you proceed without an attorney. If you are represented by an attorney, the attorney must certify in writing that he or she advised you of the legal effects and consequences of the reaffirmation agreement, including a default under the agreement. The attorney also has to certify that you made a fully informed decision to enter into the agreement, that you voluntarily decided to reaffirm the debt and that the reaffirmed debt will not impose an undue hardship on you or your dependants.
If you are not represented by an attorney, then, after filing the agreement with the bankruptcy court, the debtor will receive a hearing after filing the agreement with the bankruptcy court, you will receive a hearing date to appear before the judge to explain why you would like to reaffirm the debt and how you can afford to make the payments. The judge must approve the reaffirmation agreement by finding that it is in your best interest and that it does not impose an undue hardship on you or your dependents.
You must appreciate and understand that drafting reaffirmation agreements is at least mildly complex. Among other things, it is necessary to denote the precise terms of the loan including the precise current outstanding balance and all subsequent payments. Only in rare situations would you have that information. Accordingly, I do not draft reaffirmation agreements. The lender must draft this document. Typically secured lenders will send me proposed reaffirmation agreements when you file bankruptcy. If they do not voluntarily send me those documents and you wish to reaffirm, you must contact the lender and ask them for a reaffirmation agreement. I simply do not have enough information to be able to draft the reaffirmation agreement.
Finally, be advised that you are free to renegotiate the terms of your loan. If you have a high interest auto loan you may want to call the lender and tell them that you are unwilling to reaffirm unless they negotiate the interest rate or possibly lower the payments.
CAN A REAFFIRMATION AGREEMENT BE CANCELED?
A reaffirmation agreement can be cancelled by you if it is done before the discharge in your case or before sixty days from the date it is filed with the bankruptcy court, whichever event occurs sooner.
SUMMARY
As with any contract, you should think very carefully before signing a reaffirmation agreement. You should consider whether it is worth it to bind yourself contractually to make the payments. It generally is not advisable to sign a reaffirmation agreement if you can purchase replacement property for less than the cost of keeping your property under the reaffirmation agreement.
Since entering into a reaffirmation agreement may have significant financial consequences, you should be certain that you fully understand the terms and ramifications of the agreement before signing. Only by making an informed decision will your interest be protected.
The laws regarding reaffirmation in a Chapter 7 are complicated and confusing. I put a lot of effort into drafting this document. I have explained the law as best I can. If you have questions, I would be happy to answer them. However, you must decide whether you want to reaffirm or not. I cannot make that decision for you.
I am not trying to be coy about this. You must appreciate the fact that I cannot anticipate what your future financial situation might be. Nor can I anticipate what actions a creditor may or may not decide to pursue. You must make your decision.
