Reaffirmation Agreements in bankruptcy: What They Are and Why You Shouldn’t Sign One

A bankruptcy filing will discharge your personal liability on most debt. This includes secured assets, for example, vehicles or mortgages. Although your personal liability on the loan is dischargeable, if you want to keep the secured property you have to keep making payments. Some creditors will also request you sign a reaffirmation agreement after your chapter 7 bankruptcy is filed. A reaffirmation agreement typically says that you will keep your terms of your debt the same as if you had not filed bankruptcy, including your personal liability on the loan. 

In most situations signing a reaffirmation agreement is not advised. A big reason for this, is because you file to get rid of your debt and by signing a reaffirmation agreement you are re-committing yourself to the debt you filed on. 

For example, let’s say you owe $10,000 to XYZ creditor for your vehicle loan and you signed a reaffirmation agreement during your chapter 7 bankruptcy. Now let’s say after your bankruptcy was discharged, for one reason or another, you decide to surrender your vehicle to XYZ creditor. XYZ creditor will auction off your vehicle and, typically, receive less than you owe on the loan. When they do this, they will then turn around and sue you for the deficiency on the vehicle that you are personally liable for.

Now, let’s say in the above scenario you did not sign the reaffirmation agreement. If you decide to surrender your vehicle during or after the bankruptcy, XYZ creditor cannot sue you personally, because your personal liability on the loan was discharged in your case. 

Generally, signing a reaffirmation agreement is not the best option, but there are circumstances when it may be best for you. Before making any decisions, please reach out to your attorney.

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For any questions you have regarding reaffirmation agreements or anything else bankruptcy related, visit www.lifebacklaw.com to speak with an attorney today. You will be glad you did!