How Does Reaffirmation in Bankruptcy Work?

by Beverly Bird

Bankruptcy is about fresh starts. Filing for Chapter 7 protection allows your bankruptcy trustee to liquidate property you own outright, without liens, and apportion the proceeds among your creditors, although you can use exemptions to protect some property. You have to qualify by meeting certain income requirements, but if you do, bankruptcy legally erases any debts the trustee can't pay through liquidation. The bankruptcy process discharges them and you're not liable for paying them any longer – unless you reaffirm them.

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How Reaffirmation Works

Shortly after you file your bankruptcy petition, some of your creditors may offer to reaffirm your debts with them. Their only other option is that your bankruptcy will discharge the debts, and they'll never receive payment. If you reaffirm, you'll continue to be obligated to pay the balances. With the exception of real estate reaffirmations, you typically need the approval of the bankruptcy court to reaffirm any debt. You'll sign a new agreement with the creditor and submit it to the court. The court may not allow you to reaffirm, depending on several factors, such as if you owe more than the collateral is worth or you won't have the ability to handle the payments post-bankruptcy.

Why Reaffirm?

Debtors normally reaffirm debt because they want to keep the collateral on secured loans. Bankruptcy erases your obligation to pay these loans, but you don't get to discharge them and keep the house or automobile as well. In the case of an auto loan or mortgage, you avoid the possibility of repossession or foreclosure when you reaffirm because you're still on the hook financially for the loan. As long as you make the payments, the lender can't reclaim the collateral. Credit card companies may also propose reaffirmation agreements in exchange for allowing you to keep using the card post-discharge, and entering into such an agreement might also ease some of the impact of bankruptcy on your credit report.

Effect of Reaffirmation

Reaffirmation might seem like a good idea on the surface; therefore, you may be surprised if your attorney attempts to discourage you from making such a deal. However, there are several downsides. When you reaffirm a loan, you effectively remove it from the bankruptcy process. Your Chapter 7 proceedings will not discharge it along with your other debts; you'll still owe the balance after your bankruptcy is over. If you can't make the payments, the creditor can sue you for the balance, just as it could have if you never filed for bankruptcy in the first place. You'll have no protection after reaffirmation because you can't file for bankruptcy a second time to discharge these debts for a considerable period of time, usually eight years. If you reaffirm a credit card, the creditor may reduce your credit limit and you may have to pay hidden fees for the right to keep your card.

Changing Your Mind

If you sign a reaffirmation agreement then have second thoughts, you have a short period of time to rescind or undo the agreement. Bankruptcy law gives you 60 days to change your mind, or until your bankruptcy is over and the court has discharged all your other debts, whichever comes first. You'll have to notify both the court and your creditor, but if you do so within the allotted time, the court will discharge the debt. If the debt is secured, such as an auto loan or mortgage, keeping the collateral without reaffirmation usually depends on the goodwill of the lender and whether you keep the payments current. Some won't repossess or foreclose even without a reaffirmation agreement, provided you're paying the loan as you originally agreed before you filed for bankruptcy. However, without a reaffirmation agreement, they do have the right to do so.