What is a reaffirmation agreement?
June 28, 2022
By Diane Drain Attorney & Retired Law Professor
To reaffirm a debt, the Debtor must sign a new contract with the lender, reaffirming his or her personal liability for the loan.
This is commonly done with automobiles. Before reaffirming any personal liability for a debt, the Debtor should always consult with their counsel. There may be alternatives to confirming the lien, such as surrender, redemption, or avoidance. If a debtor voluntarily decides to reaffirm and re-establish their personal liability to a creditor after considering their choices and entering into a formal agreement to that effect signed by both the debtor and the creditor, the debtor must then present the agreement to the Court for approval.
Even after signing the reaffirmation agreement, the Debtor has 60 days to cancel it.
If a debtor does not take advantage of other options before confirming the obligation, the debtor is obligated by the conditions of the new arrangement and can be sued if the debt is not paid.
The Debtor faces the risk of being sued on any new deal they sign after filing bankruptcy.
If the debtor does not sign a new contract, the lender will not be able to sue, but they may be able to repossess the vehicle – MAYBE. This is where things get a little more difficult. The Debtor could keep their automobile under the former bankruptcy legislation as long as they made regular monthly payments and kept their insurance current. A reaffirmation agreement was not needed of them. That way, if the car later turned out to be a lemon, the Debtor may surrender it to the lender and avoid any deficiency action (lawsuit).
Under the 2005 Reform act, a reaffirmation agreement is only binding if it is entered into before the discharge is filed, the debtor receives the numerous disclosures required from the creditor (except credit unions – 524(c). The debtor does not rescind the agreement, and the court approves the reaffirmation agreement (which may include a hearing). (524)(c).
If it appears that the Debtor will be unable to make the contractual payments, the Court may refuse to sign the reaffirmation agreement.
So, what exactly is the issue? Some creditors argue that if the debtors want to keep the car, they must sign a reaffirmation agreement under the new bankruptcy law. However, a debt must be “enforceable under relevant non-bankruptcy law, whether or not discharge of such debt is waived,” according to Section 524(c). There does not appear to be a default that is “enforceable under applicable non-bankruptcy law” if the Debtor keeps the car payments current, has insurance, but refuses to sign the reaffirmation agreement. After all, the creditor is getting paid every month.
However, because the law is always changing, it is crucial to consult with an attorney before signing any arrangement.
Your lawyer has the option of signing or not signing your reaffirmation agreement. Negative disposable income, no concessions by the creditor on principal or interest, or the attorney considers there is an undue hardship assumption. You must sign a Reaffirmation Agreement Explanation detailing why you now have the financial ability to pay a reaffirmed debt if your attorney does not “allow” reaffirmation. Your explanation will be reviewed by the bankruptcy court, who will either deny or grant the reaffirmation. If the bankruptcy court decides that reaffirmation is not in your best interest for a “fresh start,” he or she will deny it.
About the Author: Diane Drain
Diane is a well respected Arizona bankruptcy and foreclosure attorney. As a retired law professor, she believes in offering everyone, not just her clients, advice about bankruptcy and Arizona foreclosure laws. Diane is also a mentor to hundreds of Arizona attorneys.
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