What is a Reaffirmation Agreement?
What is a reaffirmation Agreement?
A reaffirmation agreement is a legally binding contract between a debtor and a creditor. It specifies that a debtor agrees to repay some or all of their debts in spite of having sought the protection of bankruptcy. An agreement of this nature is not strictly necessary to maintain possession of a car after the bankruptcy process has commenced. Car loans form an exception to the general rule of secured debt management in bankruptcy law. A debtor who unequivocally asserts their desire to keep their vehicle and continue car payments, and who has the income to achieve that goal, may exclude their car loan from their bankruptcy discharge, along with any personal liability for the loan . In a reaffirmation agreement, it is the debtor who desires to keep their vehicle, and it is the creditor who may ask for a bankruptcy discharge for any remaining liability. A reaffirmation agreement specifically permits the debtor to continue possession of their car after filing bankruptcy because the agreement specifically allows the creditor to hold the debt outside of the bankruptcy process. Through the reaffirmation agreement, the debtor consents to make their car loan a valid obligation regardless of the bankruptcy process.
Reaffirmation Agreement Benefits
In most cases, the repossession of a vehicle comes at great personal and emotional loss to the debtor. A reaffirmation agreement alleviates the disruption in your life caused by car repossession, and it’s commonly entered into for several reasons.
First, you can keep your vehicle. Second, you’re permitted to rebuild your credit. This means that even if you’re filing bankruptcy and your vehicle is worth 20% less than what is owed, by entering into a reaffirmation agreement with the lender and continuing to make your car payments on time, that vehicle can be paid off and your credit restored to better than it was prior to filing for bankruptcy.
Reaffirmation Agreement Risks
You could end up being on the hook when you thought you were relieved of repo and liability. Here’s the most likely scenario: You wait several months after your bankruptcy discharge to sell your vehicle, only to find out that the lender will not accept payment in full. In other words, they want payment plan terms. They may even demand a lump sum written out, but they refuse to transfer the title unless you sign a reaffirmation agreement. You are stuck because you need to sell your car and cannot afford to continue it, or you simply need to put some money back in your pocket after you have gone from bankruptcy, and you do not want or cannot afford the risk of the car. You are under great pressure to accept the terms. You are terrified of the creditors and what they can do. You sign. You have reaffirmed the debt.
Many recently reaffirmed debtors attempt to rescind reaffirmation agreements or work out new payment arrangements with lenders only to eventually find themselves being taken to bankruptcy court over the reaffirmed debt and forced to defend their reaffirmation. In some instances, it is the lender who wants to rescind its reaffirmation agreement. In other cases, the debtor wants to walk away from the agreement, but is unable to do so without a fight with the creditor. The question is why you would ever consider reaffirming an auto loan, mortgage, credit card debt, or any other type of loan for that matter? In considering that, we have to recognize the risks involved with reaffirming a debt.
Reaffirm Car Loan Process
The process for reaffirming your car loan begins with a discussion of the terms with your attorney and the documentation. If an agreement is reached, you must complete a Reaffirmation Agreement and file it with the court. You will receive a hearing date on the agreement, which is generally around 30 days after the agreement is signed. Either you or your attorney can attend the hearing, however, it is preferable for you to attend, as the judge will generally ask you a few questions and it shows that you are serious about retaining the vehicle and have a vested interest in the outcome. You will not be put in front of the judge until all of the other hearings for people who are representing themselves have been completed , which may take a while. The court is not prejudiced against you because you would like to keep your car, and do not assume the judge will rule against you simply because you are not represented. In most cases, the judge will approve the agreement.
If the judge approves the agreement, a notice will be sent to the creditors informing them of the amount you owe and reminding them that the debt is covered by the agreement, i.e., that you have chosen to keep the car instead of surrendering it to the lender. There is no follow-up procedure for you when the loan is reaffirmed, and most reaffirmation agreements are not terminated when you obtain your discharge. Some credit card companies may still consider the reaffirmation an open debt and add another affirmative trade line to your credit report.
Alternatives to Reaffirmation
Once again the Bankruptcy Code provides alternatives to reaffirmation.
Amount Due: $10,000
Value: $6,000
Exemption: $4,800
Equity in Car: $1,200
The alternative options are:
Redemption
If you own a car worth $6,000 and have an unpaid balance of $10,000, you may be able to redeem the car by paying $1,200 (the difference between the exemption and the equity in the car).
The requirements for redemption are rather strict. Your attorney must file a motion with the court to redeem the car. If the motion is granted, you must pay the debt within thirty days. If you don’t have $1,200 at once, you may be able to negotiate a payment of $400 per month until the debt is paid in full. You are not allowed any additional credit for this redemption.
Here is how it works. Under the Bankruptcy Code, an individual who files a bankruptcy petition can redeem property by paying the amount that the debtor claims it is worth. In the example above, the debtor would pay $6,000, which is his opinion of the value of the car. However, if a bank or a judge believes the car is worth much more, the creditor might be willing to entertain a compromise. In that case, you the debtor may have a chance to redeem the car. This is often the best alternative when you can afford to make a cash lump sum payment.
Surrender
If you don’t want to keep the car, surrendering it to the lender is your best option.
Surrendering a car is the equivalent of handing in the keys or signing the pink slip and letting the lender drive it out the door. No payments, no reaffirmation, just a like paying rent you’ve stopped paying.
The lender will then sell the car or take it through repossession. Once the lender has sold the car, they will send you the surrenders statement. This statement will inform you of the sale price and how much you owe. If the sale price is higher than the amount owed, the lender will send you the difference.
If the amount owed is higher than the sale price, you may still owe money after surrendering the car. Before surrendering a vehicle, ensure that you understand the risk of a deficiency judgment based on your state’s deficiency judgment laws.
Get Legal and Financial Advice Prior to Reaffirming
A reaffirmation agreement is a legally binding new contract between you and your automobile lender which will restore your personal liability for payment of the loan in exchange for the lender’s agreement to keep your vehicle free of repossession. The bankruptcy law requires that you be informed of your legal and financial options, and consult counsel prior to signing.
Consulting with a bankruptcy attorney regarding a proposed reaffirmation agreement is also advisable. Your lawyer can explain your obligations under the loan, the effect of signing the reaffirmation agreement, and answer your questions so that you can make an informed decision regarding whether to sign. Most firms do not charge for this consultation.
Personal circumstances may require entry into a reaffirmation agreement , e.g. if the court requires it to enter a new mortgage on a home you’re reaffirming. If you are petitioning to have affirmative relief provided (i.e., a money judgment) against the automobile lender on a complaint, which is filed in the Bankruptcy Court, entry of a reaffirmation agreement may be made a condition precedent to the lender’s lift of the automatic stay so that the vehicle can be repossessed.
In certain instances, consulting with a financial advisor may also be beneficial before you enter into a reaffirmation agreement. A financial advisor, not part of the bankruptcy case, may be able to assist you further in making a recommendation as to whether you should enter into the reaffirmation agreement.