The concept of reaffirmation agreements (hereafter “reaffs(s)” is confusing for many clients. Basically, a reaffirmation agreement is a contract entered into during a bankruptcy that makes a person responsible, no matter what happens, for a debt they would otherwise discharge in the bankruptcy. They apply to secured debts like mortgages and car loans. Many people believe that if they don’t sign a reaff, they will not be able to keep their house or car. This is generally not true.
These agreements are not in a person’s best interest and are not recommended by Mile High Bankruptcy. They benefit only the creditor—making a person responsible for a debt they may or may not be able to pay in the future.
Why, then, would anyone sign a reaffirmation agreement? The answer to this question requires a brief historic explanation.
Prior to the Bankruptcy Reform Act in 2005, the law was simple: if you wanted to keep a house or car, you needed simply to remain current on loan and keep the collateral insured. This was a fine system for people in bankruptcy and provided great flexibility because if their circumstances changed after the bankruptcy (the car broke down or they lost their job and could not afford the house), they could return the collateral to the creditor and were not responsible for the debt.
In 2005, President Bush signed the Bankruptcy Reform Act, which included a provision, insisted upon by the automobile lobby, that in order to keep a car after bankruptcy, a person must sign a reaffirmation agreement or surrender the car. This caused us professionals a dilemma: how could we advise people to sign agreements that could come back to harm them if they could not pay in the future?
What has developed in the last seven years is a system very much like the old system. When a lender is faced with a good paying client who wants to keep their vehicle, but refuses to sign a reaff, they will almost always accept the payments and not require return of the car. This maintains the flexibility of keeping the car and paying for the car for the client. A very few creditors, however, do insist on reaffirmation agreements, and these are considered on a case by case basis, but the usual answer is to return the vehicle, and purchase another one after bankruptcy, which is not too difficult for people with decent, steady income.
As to mortgage reaffs, there is no legal requirement to sign one. Conveniences like on-line bill paying and monthly notices may stop, but a person who wants to keep their house simply has to pay the mortgage on time every month. Mortgage company clerks often give clients incorrect information about needing a reaffirmation if they want to refinance, but the flexibility of not signing a reaffirmation far outweighs, in our opinion, the danger of being tied to a debt after bankruptcy that you cannot afford to pay.
One final word: if you keep secured property and just pay without a reaff, you will not get any “credit” on your credit report for on time payments because the debt was cancelled in the bankruptcy. Again, we feel, this is a small price to pay to avoid the risk of a disastrous potential for a non-discharged debt in the event you are unable for any reason to not pay in the future after the bankruptcy.
Because this subject is confusing for many, ALWAYS CONSULT AN ATTORNEY DIRECTLY CONCERNING REAFFS AS THEY MAY APPLY TO YOUR SITUATION. THE LAW MUST ALWAYS BE ANALYSED IN THE CONTEXT OF THE FACTS OF A PARTICULAR CASE.