A reaffirmation agreement in Chapter 7 is a new, voluntary contract that makes you personally liable again for a debt, usually a car loan, that bankruptcy would otherwise discharge. In exchange, the lender agrees you can keep the collateral. It must be filed before your discharge, it can be cancelled for a limited time, and it deserves careful thought before you sign.
Lenders often mail reaffirmation paperwork soon after a case is filed, sometimes with a deadline attached. Before signing anything a creditor sends you, call (415) 754-0115 to schedule a free consultation or send your question online; if you already have a lawyer, ask them to review it.
What a reaffirmation agreement in Chapter 7 actually does
A Chapter 7 discharge wipes out your personal obligation on most debts, but it does not remove a lender's lien on collateral. That leaves you with a choice for every secured debt, which you declare on the Statement of Intention filed early in the case:
- Surrender the property and walk away from the debt.
- Redeem the property by paying its current value.
- Reaffirm the debt and keep making payments as a personally liable borrower.
Reaffirming means that if you later default, the lender can repossess the collateral and sue you for any deficiency left after the sale, exactly as if you had never filed bankruptcy for that debt. That is the central risk.
Which debts people are asked to reaffirm
Car loans are by far the most common, followed by loans from credit unions, where a membership agreement may tie several accounts together, and financed furniture or electronics secured by a store's lien. Occasionally a mortgage servicer sends an agreement too. Unsecured debts such as credit cards can technically be reaffirmed, but there is nothing to keep in return, so the trade makes little sense.
The legal safeguards built into the process
Because reaffirmation gives up part of the fresh start, the Bankruptcy Code wraps it in protections.
Timing
The agreement must be made before the discharge is entered and filed with the court.
Disclosures
The agreement must include required disclosures about the amount reaffirmed, the interest rate and your right to cancel.
Your right to rescind
You can cancel a reaffirmation agreement at any time before the discharge is entered, or within 60 days after it is filed with the court, whichever is later. You cancel by notifying the creditor.
Court review and the undue hardship presumption
Part of the form compares your monthly income with your expenses including the reaffirmed payment. If the numbers show you cannot afford it, a presumption of undue hardship arises and the judge reviews the agreement.
With an attorney versus without one
If your attorney signs a declaration that the agreement does not impose an undue hardship and that you were fully advised, the court may not need a hearing unless the presumption arises. If you are not represented, the court must approve the agreement, usually at a reaffirmation hearing, and must find it is in your best interest and does not impose an undue hardship.
Alternatives worth weighing
Redemption
For personal-use property such as a car, you can redeem by paying the lender the collateral's current replacement value in a lump sum, even if you owe much more. When a vehicle is worth far less than its loan balance, redemption can be attractive, though you need access to the lump sum.
Keeping current without reaffirming
Some lenders continue to accept payments and do not repossess a car that stays current, even without a reaffirmation. This is sometimes called "ride-through." It is not reliable: many loan contracts allow repossession after a bankruptcy, and the Code's rules on statements of intention, tightened in 2005, give lenders more leverage. Your attorney can explain how this plays out with your specific lender. Our article on keeping your car in bankruptcy covers vehicle loans in more detail.
Surrender and replace
If the loan is far larger than the car's value or the payment strains your budget, surrendering and buying a less expensive vehicle after discharge may cost less overall.
Mortgages
Many attorneys are cautious about reaffirming home loans, because the risk of personal liability for a deficiency is large. Whether keeping the house without reaffirming is workable depends on the lender and the loan.
Questions to ask before you sign
- How much do I owe compared with what the property is worth today?
- Can I comfortably make this payment for the rest of the loan, including insurance and repairs?
- Is the lender offering any change in terms, such as a lower rate or balance, in exchange for reaffirming?
- What happens if I do not reaffirm? Does this lender repossess vehicles that stay current?
- Is redemption realistic, and would it cost less?
- Is this a debt I would want to owe even if the property were destroyed or stolen?
If several answers make you uneasy, that is a signal to slow down.
How The Somal Law Firm helps
Reaffirmation decisions are part of every Chapter 7 case Bob Somal handles through the firm's bankruptcy practice for clients in Pleasanton, Dublin, San Ramon, Danville and elsewhere in the East Bay. That includes reviewing the lender's paperwork, weighing surrender, redemption and reaffirmation, and deciding whether he can sign the attorney declaration for the agreement.
Frequently asked questions
Do I have to reaffirm my car loan to keep my car?
Not always. Some lenders allow you to keep a car that stays current without reaffirming, and redemption is another option. An attorney can review your lender's practice.
Does reaffirming help my credit?
It can mean payments continue to be reported, but that benefit rarely outweighs the risk of owing a deficiency later.
Can a lender force me to reaffirm?
No. Reaffirmation is always voluntary, and no one can require you to sign as a condition of receiving your discharge.
What if I already signed?
Check the rescission deadline right away. You may still be able to cancel.
Signing a reaffirmation agreement takes a minute; living with it can take years. Call (415) 754-0115 or contact Bob Somal online for a free consultation. Bring the lender's paperwork and your loan statement, and you will get a clear explanation of your choices before any deadline passes.
Attorney Advertising. This article is general legal information for Bay Area residents, not legal advice, and does not create an attorney–client relationship. Every situation is different — please consult a licensed attorney about your specific circumstances.