What is reaffirmation agreement in a bankruptcy case?

You need to fully understand the implications of reaffirmation agreement before you agree to sign one

For debtors in Florida, a Chapter 7 bankruptcy can provide a welcome relief from the stress caused by debt. A Chapter 7 filing brings with it the automatic stay, which instantly stops all creditor collection activity for the term of the bankruptcy and alleviates the constant barrage of phone calls and demand letters in your mail.

Within about six months, you will obtain your discharge, and it is important to understand what the discharge does. It ends your personal obligation to repay any of the unsecured debts that you have. If you have secured debts, such as a home or a vehicle, you have to decide whether you can afford to keep those items.

If you have possession of a car or truck and are making payments, you will have to decide if you can afford the vehicle and secondly, whether you should keep the vehicle. If you are far behind in your payments and the outstanding loan amount is now much higher than the value of the vehicle, in almost all cases, you will want to surrender it and simply buy a much cheaper used vehicle.

If you are current on all of your payments and the remaining balance of the vehicle is relatively low, you probably will want to keep the vehicle, assuming it is still in good working order.

It is essential that you be able to afford the payments, because if you exit your bankruptcy and six months later lose your job, your lender will still have a security interest in the vehicle unless you paid it off by then and they will be entitled under Florida law to repossess the vehicle.

After discharge

However, what happens next depends on what happened in your bankruptcy. A bankruptcy discharge ends your personal responsibility to repay any debts you had on the date of filing. While the lender could repossess your vehicle after the bankruptcy is completed for your failure to make payments, that is all they can do.

They cannot come after you for the difference between what they can sell the vehicle for at auction and the remaining balance of your loan. This is known as the deficiency balance. The bankruptcy discharge eliminates your responsibility for this deficiency balance.

Unless you reaffirm

Most lenders will attempt to have you sign what is known as a "reaffirmation agreement." This is a new contract that reinstates your remaining loan balance after the date of your filing the bankruptcy. In this way, it is insulated from the discharge. It is also important that it must be signed prior to the discharge in the bankruptcy to be effective.

Obviously, most lenders would greatly prefer that you reaffirm. Some, like Ford Motor Credit, seem to insist that if you want to keep your car, you have to sign a reaffirmation agreement. The bankruptcy courts do not require you ever sign a reaffirmation agreement, and many judges view them with caution.

Judges are wary of these agreements because you should only sign one if it is in your best interest. Determining that "best interest" needs to be done on an individual basis. You must be certain you can afford the payments and the economics of the transaction should be greatly in your favor prior to making the decision to reaffirm.

What it you just keep making your payments?

Some creditors will allow you to keep making timely payments on your vehicle because the costs of repossessing the vehicle and the much-depreciated price they will receive when they sell the vehicle at auction means they are likely to lose a significant portion of the remaining loan value. If you keep the vehicle and make all the payments, they come out ahead.

You should discuss this issue with your bankruptcy attorney and carefully consider all of the risks involved before you make your decision.