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What Is a Reaffirmation Agreement and When Is It Used?

For debtors who are unable to continue making the agreed upon payments on their unsecured loans, Chapter 7 bankruptcy offers the opportunity to eliminate their debts and get a fresh start on their finances. One of the drawbacks to this option however, is the possibility that a secured lender may request a so-called Reaffirmation Agreement be signed by the debtor. In this kind of agreement, which only affects secured loans, the loan terms are "reaffirmed" by the borrower/debtor (hereinafter “debtor”) and the debtor is allowed to retain the secured property despite being in bankruptcy, as long as the debtor continues to submit timely loan payments.

The Ins and Outs of Reaffirmation Agreements.

In a secured loan, the debtor pledges a piece of personal property as collateral for the loan. This collateral can include a home, a car, stocks and bonds, or other valuables. If the debtor does not meet the terms of the loan, in most instances the lender can confiscate the collateralized personal property and sell the property through a distressed sale in order to help satisfy the debt. With regard to Automobile (hereinafter “Auto” or “car”) loans, in particular, debtors can prevent this from happening by choosing to sign a Reaffirmation Agreement with their lender. Through this agreement the debtors promise to repay their auto loan pursuant to the original terms of their loan agreement as if they never filed for bankruptcy protection.

In other words, a Reaffirmation Agreement is an agreement between the borrower and the lender to maintain the terms of a particular loan as if it were a separate entity from the bankruptcy, and to continue to pay it as usual and in accordance with the original terms. Most attorneys agree that reaffirmation agreements only be signed if the borrower is completely confident and assured that he or she will be able to make the payments on the loan. This is particularly the case with regard to auto loans being that, should borrowers fail to pay their loans as promised, the collateral (the debtors’ car) can and, most often, will end up being repossessed with the lender incurring approximate auto loan deficiencies between $5,000.00 and $10,000.00 on average after realizing the proceeds from the distressed sale of the of the car.

Who Benefits?

Bankruptcy laws have been significantly amended over the last several years to include a number of new provisions, beneficial to both lenders as well as borrowers. Although they may seem on the surface to be beneficial for the borrower in that debtors are allowed to keep the collateral in question, the debtor could face undue financial hardship by continuing to be burdened with payments that he or she couldn't afford to make in the first place. Furthermore, and as indicated above, debtors may face Deficiency lawsuits by their auto lenders for losses incurred after the Reaffirmation Agreement is executed as if the debtors never filed for bankruptcy protection. However, debtors who want to retain their car and continue to timely submit their auto loan, but do not want to sign a Reaffirmation Agreement technically risk having their car repossessed by the auto lender or servicer even though their auto payments are current after filing for Bankruptcy protection.

Since Reaffirmation agreements can be tricky at times, the Bankruptcy Court must approve the Reaffirmation Agreement in order for it to be legally binding on the debtor and/or the lender. Under certain circumstances, such as the debtor not having legal representation and/or when there is a "presumption that the agreement is an undue hardship", the Bankruptcy Court may schedule a hearing in order to decide whether or not to allow a reaffirmation agreement to be filed/binding on both parties.

This is one example of how bankruptcy law can be exceedingly complex, and why it is rarely advisable for a person to "go it alone." Filing bankruptcy with a qualified and experienced attorney is by far the best option.