Bankruptcy

Why Would I Ever Sign a Reaffirmation Agreement?

By Mark Buckley, Rhode Island Bankruptcy Lawyer

A reaffirmation agreement breaths life back into a debt that could have been discharged in a Chapter 7 bankruptcy.  Such agreements are often made to protect a house or vehicle.  Essentially, the debtor is forfeiting bankruptcy protection in exchange for the creditor promising not to repossess the property.

It seems straightforward enough.  A client gets to keep his property and possibly rework the terms of the new contract to make repayment more affordable.  What’s not to like?

Here is what I advise my clients concerning reaffirmation agreements:

1. Signing one is like putting your foot in a bear trap.  You are no longer free to surrender the property without being personally liable; if you are late on future payments, your new credit will be adversely affected; if you miss a few payments, you can still lose the property; if the creditor does take back the property, you will be sued for the balance owed after the property is sold; and finally, you won’t be able to file bankruptcy again for 8 more years to discharge the debt.
2. The agreement requires your attorney to be a psychic.  He must look into his crystal ball and determine if you are in a good position to repay the debt.  He must then sign his name stating that the reaffirmation agreement DOES NOT impose undue financial hardship.
3. Because I don’t have psychic abilities, I don’t like the idea of giving up bankruptcy protection.   When a debtor declares in his bankruptcy petition that expenses are greater than income, I am convinced that signing a reaffirmation agreement DOES impose undue hardship.
4. Even if I could be persuaded to sign the agreement for a client, the court would still reject it if expenses exceed income.

There are many ways a qualified bankruptcy lawyer can help you protect your property.  If you are considering reaffirming a secured debt, please consider the following:

1. Never sign the agreement unless you have restructured the terms to be decidedly in your favor.  In other words, try to reduce the principal and interest, or stretch out the payment length.
2. Understand that you can revoke the agreement within 60 days if you change your mind.
3. You have leverage.  Most creditors do not want your property and do not want to take the legal steps necessary to take it back and sell it.  If you really want to keep the property, in most cases, the creditor is satisfied with you voluntarily making the monthly payment according to the terms of the discharged debt, without requiring a reaffirmation agreement. 

In other words, keep the property and keep making the payments without future liability.  There are only a few creditors who like to “eat steel” (aka repossessing a car from a debtor who has not reaffirmed the debt, but has made voluntarily payment).

Mark Buckley is a Rhode Island bankruptcy lawyer and CERTIFIED FINANCIAL PLANNER professional.  If you live in Rhode Island and are struggling with excessive debt, call (401) 467-6800 for a free phone consult.

Full post as published by Bankruptcy Law Network on January 22, 2010 (boomark / email).