Reaffirmation Agreements in Chapter 7 Bankruptcy

When you file a Chapter 7 Bankruptcy, the United States Code requires that you include a list of ALL your creditors. Everyone that you owe money to. Yes, this includes the mortgage and car loans that you are going to keep through the process. They still have to be listed, even though you intend on keeping the item and continuing to pay for it. (Remember, if you want to keep your house and/or car in a Chapter 7 Bankruptcy, you must, among other things, be current on the payments when you file, and you must remain current on the payments afterwards).

Then what happens to your mortgage and car loans in a Chapter 7 Bankruptcy?

1)     The Mortgage and Car loan companies will typically send out a “Reaffirmation Agreement.”

A Reaffirmation Agreement is a new contract with that company in which you would “reaffirm” your old loan. It is a new contract with, typically, the same exact terms as the loan that you had to include in your bankruptcy. Thus, it essentially treats the mortgage and car loans as if they were not included in your bankruptcy.

You may, but are not required to, sign this new contract (the Reaffirmation Agreement). There are pros and cons to signing a Reaffirmation Agreement:

Pros:

a)      Your mortgage and car payments will continue to be reported to your credit report, typically. Assuming you stay current on these payments, this can help rebuild your credit.

b)     If you wish to speak with the loan company regarding your loan, the loan company will be willing to speak with you, because you have a valid contract (Reaffirmation Agreement) with them.

c)      The loan company is not allowed to take action against the collateral (foreclose on the house, or repossess the car), so long as you stay current on the payments and do not otherwise breach the contract.

Cons:

a)      You would be contractually obligated to pay the loan amount. This means that if you weren’t able to afford the payments anymore, the loan company could foreclose on the house (or repossess the car), and sue you for the deficiency balance. This would put you back in debt after the bankruptcy. There are many reasons you may not be able to afford a loan payment: Job loss, unexpected medical bills, other increased expenses, other decrease in income, etc.

b)     You would be contractually obligated to pay the loan amount, even if you no longer wanted the house or car for whatever reason. If your car engine or transmission fails and you still owe $12,000 on your car, you are liable for that $12,000, one way or another. If you want to trade it in on a newer car that works? You will have to carry-over that negative equity onto the new vehicle. If you voluntarily surrender the vehicle, the loan company will hold you liable for any deficiency balance.

Things to consider when deciding whether or not to sign a Reaffirmation Agreement:

a)      First of all, consult with your Bankruptcy Attorney
b)     Is the mortgage or car payment low enough that it is easily affordable within your budget?
c)      Can you do better by purchasing a new house or car?
d)     What is the interest rate?
e)     What is the monthly payment?
f)       Is the house or vehicle in good working order? Or is it already showing signs of needing major repairs?
g)      Is the house or car worth more than what you still owe on it (is there equity)?
h)     Are you already considering moving to another house, or buying another car?

2)     What are your other options besides signing the Reaffirmation Agreement?

You may decide that it is not in your best interests to put yourself back on the hook for the mortgage or car loan. You are not required to sign the Reaffirmation Agreement. You could simply stop making payments, allow the house/car to go back to the loan company, and make whatever decision you feel is best for your future. Or you could hope that the loan company will continue to accept VOLUNTARY payments, and allow you to continue to purchase the house/car without committing to the new Reaffirmation Agreement contract.

As always, there are many nuances to all the decisions that come with a Bankruptcy, so it is best to consult with a Bankruptcy Attorney. Call/text me to start the process! 740-815-1114.

-Lucas Ruffing
Bankruptcy Attorney
740-815-1114
LucasRuffingLaw@gmail.com