Reaffirmation Agreements in Bankruptcy | 6 Key Things You Need to Know

What is a Reaffirmation Agreement

Reaffirmation agreements in bankruptcy are where you agree to reaffirm a debt.  In other words, you’re promising to keep an obligation where you otherwise you don’t need to.  Contracts you sign after filing bankruptcy are binding after the case is done. Given that the whole purpose of bankruptcy is to get out of debts, vowing to owe one after bankruptcy can be dangerous. Here are 6 things you need to know about reaffirmation agreements in bankruptcy.

2023 Update: Due to SB 1099, ride through has returned to bankruptcy in California, removing the need to reaffirm a car loan and making the failure to reaffirm not a default. However, this law is still new and can potentially be challenged by creditors. As with all things, discuss this with your bankruptcy attorney.

1 – Why Would I Reaffirm a Debt in bankruptcy?

As a rule, you’d reaffirm a debt because you had to. Really, there’s normally no other valid reason. And the US Bankruptcy Code says that there’s one kind of debt you really need to reaffirm in bankruptcy: a car loan for a car that you intend to keep. To keep an exempted car in Chapter 7 bankruptcy, you need to stay current on payments, and complete a reaffirmation agreement. Then there’s usually a hearing, where if you’re lucky, the judge disallows it. Note: credit unions lobbied to get themselves exempt from this requirement of reaffirmation agreements, at 11 USC 524(m)(2).

2 – A Car Lender Failing to Send a Reaffirmation Agreement Is a Win for You

A Reaffirmation Agreement in bankruptcy only benefits the creditor. It is not something that helps you. Think of it as as a Sword of Damacles hanging over your head, or giving your car lender a hammer to hit you with if you ever lose your car.

If they don’t give you a hammer, it could be a good thing. You still have to follow the law and do what you said you’d do on your Statement of Intention within 45 days of the 341(a) Meeting of Creditors, including reaffirming the car loan. If you’re current, it’s rare for a lender to repossess for failing to reaffirm.   If you ever lose the car to repo, failing to have an executed and approved reaff against you means they can’t come after you for money.

3 – It’s Good if The Judge Disallows Reaffirmation Agreements in Bankruptcy

A reaffirmation agreement is only valid if the creditor files it with the court and the judge approves it. And remember, we don’t want you the reaffirmation to be binding. So, if the creditor doesn’t file it, or the judge turns it down, there is no binding agreement. The hammer has been taken out of the creditor’s hand. And if there’s no binding contract, you can’t be liable after the bankruptcy discharge. Celebrate!

4 – You Don’t Want Reaffirmation Agreements for Mortgages

“Should I reaffirm my mortgage?” Why would you? It’s not required. We’ve established that a reaffirmation agreement is promising to owe a debt after bankruptcy no matter what. There’s confusion about whether you should reaffirm a mortgage debt. Mortgage lenders love to mess with their customers. They make them think they need to sign a reaffirmation agreement for mortgages. This is bad for you. You are saying you’ll owe hundreds of thousands of dollars even if you lose your house to foreclosure in the next 30 years.

Can you guarantee you won’t lose your job or health in the next few decades? Of course not. Promising to owe this money no matter what is dumb, and there are very few valid reasons to do it.  But your mortgage lender will tell you that you need to reaffirm a mortgage.

Further, because you didn’t reaffirm your mortgage debt years ago, they get to punish you now by failing to report your current payments to Equifax, or turning down your refi, and it’s your bankruptcy lawyer’s fault. This is wrong. They are punishing you now because they are trying to hurt you, and turning you against your bankruptcy attorney for successfully protecting you from owing a quarter-million dollars on a house you may lose in the future. Thank your bk lawyer with a nice card, and think seriously about switching mortgage lenders to a company that is not evil.

5 – Don’t Do a Reaffirmation Agreement for Student Loans

After BAPCPA in 2005, student loans in bankruptcy aren’t dischargeable (note: this may change with the S2598 Fresh Start Through Bankrutcty Act of 2021).  So, if student loans are sticking with you after the bankruptcy discharge, there’s no reason to agree to reaffirm something that isn’t going anywhere anyway. It’s like double-promising to pay taxes next year: completely unnecessary since you need to pay it anyway.

6 – You have Limited Time To Change your Mind and Cancel a Reaffirmation Agreement

It happens. You sign a reaffirmation agreement, the creditor files it with the court, and it’s approved. Now you’re stuck owing the debt no matter what. But what if your car then blows up? Do you have to pay that loan balance to zero? It depends. Bankruptcy Code section 524(c)(4) says you have 60 days for rescission, the fancy legal word for changing your mind.

Bottom Line

The bottom line of reaffirmation agreements are that they are bad for you. However, if you said you’d reaffirm a car in your Statement of Intention, you need to do it. If you don’t get one, be happy, but think about the risk you’re taking by not following the law and reaffirming anyway, where they can repossess the car.  On the one hand, you don’t want to be forced to give your lender an insurance policy to whap you on the head with.