Understanding Reaffirmation Agreements & Your Bankruptcy Options

Reaffirmation agreements can seem like a complex part of bankruptcy, but understanding them is important if you’re considering one.

If you have filed for bankruptcy and are thinking about a reaffirmation agreement, you need to grasp what this decision involves. This guide will explain what you should know about these agreements and how they might influence your financial journey after bankruptcy.

What Are Reaffirmation Agreements?

A reaffirmation agreement is a formal contract you make with one of your creditors during your bankruptcy case. This agreement allows you to keep specific personal property, like a car or furniture, that is collateral for a secured debt. By signing this agreement, you promise to continue paying that particular debt even after your other eligible debts are eliminated by the bankruptcy discharge.

This might seem to go against the main purpose of bankruptcy, which is often to achieve debt relief. However, in certain situations, a bankruptcy reaffirmation can be beneficial for the debtor. For instance, you might want to reaffirm your auto loan to keep your vehicle, which could be essential for commuting to work or for family needs.

Essentially, when you enter a reaffirmation agreement, you are choosing to exclude one specific debt from the overall discharge you receive. This means you remain personally liable for that reaffirmed debt. Understanding reaffirmation involves recognizing this ongoing obligation.

How Reaffirmation Agreements Work

When you file for bankruptcy, particularly Chapter 7, you face choices for how to handle secured debts, which are debts linked to specific property. You can surrender the property to the creditor, effectively giving it back. Another option is to redeem the property by paying the creditor its current market value in a single lump sum payment.

The third option is to reaffirm the debt. If you choose to reaffirm, you typically begin by discussing terms with the creditor. Sometimes, the creditor might offer more favorable terms, such as lower loan rates or a reduction in the principal balance, to encourage you to reaffirm the debt and continue paying.

Once you and the creditor agree on the terms, these are formalized in the reaffirmation agreement. The debtor agrees to these terms, and the property subject to the agreement remains in your possession as long as you meet the payment obligations. The debt includes all specified terms, such as interest and any associated fees.

The Approval Process

After you and the creditor sign the reaffirmation agreement, it is not automatically binding. Your bankruptcy court must approve most reaffirmation agreements before they become legally enforceable. The judge reviews your financial details to make sure you can actually afford the payments on the reaffirmed debt without causing undue hardship.

If you are represented by an attorney in your bankruptcy case, your attorney must also review and sign the reaffirmation agreement. Their signature certifies that they have advised you of the legal consequences and that they believe the agreement does not impose an undue hardship. If your attorney does not sign, the court will schedule a hearing to determine if it should approve reaffirmation.

If you file bankruptcy pro se (without an attorney), the judge will always schedule a hearing. During this hearing, the judge will ask questions about your monthly income and monthly expenses to decide if reaffirming the debt is in your best interest and if it poses an undue hardship. The court’s role is to protect debtors from making unwise financial commitments that could undermine their fresh start.

The necessary reaffirmation documents, including the official bankruptcy form for reaffirmation (often Form B2400A), must be completed accurately. A reaffirmation agreement cover sheet is also typically required when filing reaffirmation documents with the court. It is important that the agreement file is complete and submitted correctly to the bankruptcy court.

Pros and Cons of Reaffirmation Agreements

Like any significant financial choice, entering into reaffirmation agreements comes with both potential benefits and drawbacks. It’s important to weigh these carefully before making a decision during your bankruptcy proceedings.

Advantages of Reaffirming

• You can keep essential personal property, such as a vehicle secured by an auto loan, that you might otherwise lose.
• You might be able to negotiate more favorable terms for the debt, such as a lower interest rate or reduced principal balance, though this is not guaranteed.
• Making timely payments on a reaffirmed debt can help you rebuild your credit history after bankruptcy, potentially improving your chances of getting new credit or better loan rates in the future.
• It provides certainty about keeping an asset you value or need.

Disadvantages of Reaffirming

• You remain personally liable for the reaffirmed debt, meaning it is not discharged in your bankruptcy.
• If you default on the reaffirmed debt after your bankruptcy, the creditor can repossess the property. They can also sue you for any remaining balance, known as a deficiency judgment.
• You might end up paying more than the property is currently worth, especially if the property subject to the debt has depreciated significantly below the loan balance.
• The monthly payment for the reaffirmed debt could strain your finances, making it harder to manage other monthly expenses or build up savings accounts.

When Should You Consider a Reaffirmation Agreement?

A bankruptcy reaffirmation agreement can be a sensible choice in specific circumstances. You might consider reaffirming a debt if:

• The personal property is truly essential, such as a car you rely on for work or family transportation, and replacing it would be more costly or difficult.
• The property’s current market value is equal to or greater than the amount you owe on the debt.
• You can comfortably afford the monthly payment without causing undue hardship to yourself or your dependents, even after considering all your other monthly expenses.
• The creditor has offered significantly better terms than your original agreement, such as a lower interest rate or a principal reduction, making the reaffirmed debt more manageable.
• The item has significant non-financial value to you, and you are fully aware of the financial implications of keeping it.

However, reaffirmation is not always the best path. If the property is worth substantially less than the outstanding loan balance (you have negative equity), or if the monthly payments would stretch your budget too thin, it might be wiser to surrender the property.

Careful consideration of your post-bankruptcy financial stability is crucial.

Think about your ability to build up your checking accounts and savings accounts if you take on this debt. If reaffirming a debt prevents you from saving or makes it hard to afford essentials, it might not be the right decision. Sometimes, a lower interest rate on a personal loan for a replacement item might be better than reaffirming a high-interest existing debt, especially if your credit has improved since originally taking out the loan.

Alternatives to Reaffirmation Agreements

Before you decide to enter reaffirmation agreement, it’s important to explore other available options for handling secured debt in bankruptcy. Each alternative has distinct outcomes and may be more suitable depending on your specific financial situation and goals for debt relief.

• Redeem the property: Redemption allows you to keep the property by paying the creditor its current fair market value in a single, lump-sum payment. This option is often used for personal property like cars or furniture. If the amount you owe is significantly higher than the property’s value, redemption can save you money, but coming up with the lump sum can be challenging.
• Negotiate with the creditor to keep the property without reaffirming (Ride-Through): In some jurisdictions, and with some creditors, you might be able to continue making payments on a secured debt without formally reaffirming it. This is sometimes called a “ride-through.” However, this option is not available everywhere and carries risks; the creditor might still be able to repossess the property later, even if you are current on payments, as the underlying personal liability was discharged.
• Surrender the property: You can choose to give the property back to the creditor. Once surrendered, the bankruptcy discharge will eliminate your personal liability for any remaining debt associated with that property. This can be a good option if the property is worth less than you owe, or if you can no longer afford the payments.

The best choice hinges on factors like the type of property, its value, the loan terms, and your overall financial picture post-bankruptcy. Evaluating these alternatives thoroughly is a key part of understanding reaffirmation and its place in your financial fresh start.

Option	Keep Property?	Future Personal Liability for Debt?	Payment Structure	Credit Impact Notes
Reaffirmation Agreement	Yes, if payments are made.	Yes, for the reaffirmed amount.	Ongoing monthly payments per agreement.	Can help rebuild credit if payments are timely; default harms credit.
Redemption	Yes, outright ownership.	No, debt paid off at current value.	Lump-sum payment of current market value.	Debt settled; may require new financing which impacts credit.
Surrender	No, property returned to creditor.	No, debt discharged in bankruptcy.	No further payments on that debt.	Debt discharged; may need to acquire replacement asset.
Ride-Through (if available)	Potentially, if payments are made and creditor allows.	No, personal liability discharged (but lien remains).	Continue regular payments.	Payments may not be reported to credit bureaus; risk of repossession exists.

How to Negotiate a Reaffirmation Agreement

If you determine that reaffirming a debt, like an auto loan, is the best course of action for you, the next step is often negotiation with the creditor. Successful negotiation can lead to more favorable terms for your reaffirmed debt. Here are some strategies:

• Know the current fair market value of the property. Resources like Kelley Blue Book for vehicles or appraisals for real property can provide this information. If you owe more than the property’s worth (negative equity), you have a stronger negotiating position.
• Be prepared to surrender the property if the creditor is unwilling to offer reasonable terms. This willingness can be a powerful negotiating tool.
• Request specific changes to your loan terms. Ask for a lower interest rate to reduce your overall cost, or request a reduction in the principal balance to match the current value of the property subject to the debt.
• Consider asking for a longer repayment term. While this might mean paying more interest over time, it can lower your monthly payment, making it more manageable within your post-bankruptcy budget and helping to avoid undue hardship.
• Understand the creditor’s position. They may prefer to receive ongoing payments, even at reduced terms, rather than undertake the costs of repossession and resale, especially if the collateral has depreciated significantly from its original purchase price.

Remember, creditors are not obligated to negotiate or change the terms of your existing credit account. However, they often prefer a performing loan to a default. Highlighting your commitment to continue paying, if terms are adjusted, can be persuasive.

You might also want to research current loan rates for similar items. For example, if current auto loan rates are much lower than your existing car note, this could be a point of negotiation. Similarly, understanding current CD rates or money market accounts rates can give you a baseline for low-risk returns, helping you evaluate if the interest on a reaffirmed debt is excessively high.

What Happens After You Sign a Reaffirmation Agreement?

Once your reaffirmation agreement is signed by all parties and approved by the bankruptcy court (if approval is required), you are legally bound to its terms. This means you must continue paying the reaffirmed debt as agreed. Making timely monthly payments is crucial, as this debt is no longer part of your bankruptcy discharge.

If you fall behind on payments for the reaffirmed debt, the creditor has the right to take action as outlined in your loan agreement. This typically includes repossessing the collateral (like your car) and potentially suing you for any deficiency balance – the difference between what you owe and what the creditor recovers from selling the repossessed property. This personal liability is reinstated by the reaffirmation.

On the positive side, consistently making your payments on a reaffirmed debt can contribute to rebuilding your credit profile after bankruptcy. Creditors will see this positive payment history, which can make it easier to obtain new credit, such as credit cards or personal loans, at more favorable terms in the future. This demonstrated ability to manage reaffirmed debts can be a significant step toward financial recovery and moving past bad credit issues.

Can You Cancel a Reaffirmation Agreement?

Yes, there is a specific, limited window during which you can change your mind after signing and filing a reaffirmation agreement. You have the right to rescind (cancel) the reaffirmation agreement. This rescission period lasts until the later of two dates: 60 days after the agreement is filed with the bankruptcy court, or the date your bankruptcy discharge is entered.

To rescind the agreement, you must notify the creditor in writing that you are canceling it. It’s important to keep a copy of this notification and proof of its delivery. Once this rescission period expires, the reaffirmation agreement generally becomes permanent and binding, unless you can later prove it was obtained through bad faith by the creditor or that it imposes an undue hardship that wasn’t apparent at the time of approval.

Understanding this cancellation option is vital. If your circumstances change unexpectedly shortly after the reaffirmation agreement is filed with the court, or if you have second thoughts, this provision offers a way out. However, relying on this is not ideal; thorough consideration before signing is always the best approach when dealing with reaffirmed debts.

Types of Debt and Reaffirmation

Reaffirmation agreements most commonly involve secured debts, where a creditor has a lien on specific property. The nature of the debt and the property influences the decision.

For an auto loan, reaffirmation is frequent because a vehicle is often essential. People reaffirm their car note to continue driving for work and daily life. The decision often balances the car’s value, the loan balance, and the ability to make the monthly payment.

Reaffirming debt on real property, like a mortgage, is more complex and less common in some jurisdictions, particularly within Chapter 7 bankruptcy. Many mortgage lenders do not require a formal reaffirmation agreement if the debtor remains current on payments and indicates their intent to retain the property. However, without reaffirmation, if you later default, the lender can foreclose, but your personal liability for any deficiency might be discharged by the bankruptcy. Current mortgage rates and your home’s equity are significant factors if considering reaffirming a mortgage.

Other personal property secured by loans, such as furniture, electronics, or jewelry (often through rent-to-own agreements or secured personal loans), can also be subject to reaffirmation. Here, it’s critical to compare the outstanding debt against the actual current value and the original purchase price. Often, these items depreciate quickly, and reaffirming may mean paying much more than they are worth.

The Reaffirmation Agreement Document Itself

The reaffirmation agreement is a formal legal document, typically an official bankruptcy form like Form B2400A, titled “Reaffirmation Agreement.” This form reaffirmation requires specific information. It details the nature of the debt, including the creditor’s name, the amount of debt being reaffirmed, the interest rate, and the payment schedule.

A crucial part of the reaffirmation documents is the disclosure of the debtor’s financial situation. You will need to provide your monthly income and monthly expenses. This information helps the court, and your attorney if you have one, determine if you can afford the reaffirmed debt payments without undue hardship. Accuracy here is vital.

A reaffirmation agreement cover sheet (often Local Form B2400A/B ALT) is also usually required by the bankruptcy court when the agreement file is submitted. This cover sheet summarizes key information from the agreement for the court. Filing reaffirmation documents correctly and completely is important for the court to review and approve reaffirmation if appropriate.

Reaffirmation in Different Bankruptcy Chapters

Reaffirmation agreements are primarily a feature of Chapter 7 bankruptcy. In Chapter 7, the goal is a liquidation of non-exempt assets and a discharge of most debts, providing a “fresh start.” If a debtor wants to keep secured property and continue paying for it, a chapter reaffirmation is the formal mechanism to do so, re-establishing personal liability for that specific debt.

In Chapter 13 bankruptcy, reaffirmation agreements are much less common. Chapter 13 involves a repayment plan over three to five years, where debtors make payments to a trustee who distributes them to creditors. Secured debts, like car loans or mortgages, are typically handled through the Chapter 13 plan; the plan can cure defaults and modify some secured loan terms. Therefore, a separate agreement reaffirming the debt is often unnecessary because the plan itself addresses how the secured creditor will be paid.

How Bumbaugh George Prather DeDiana Can Help

Handling reaffirmation agreements can be a challenging aspect of your bankruptcy case. The experienced attorneys at Bumbaugh | George | Prather | DeDiana can provide valuable assistance. We can help you:

• Understand all your options for secured debts and their potential long-term consequences for your financial well-being.
• Negotiate with creditors to achieve the best possible terms if a reaffirmation agreement is pursued.
• Review any proposed reaffirmation agreement to make certain it is fair and genuinely in your best interest, considering your overall debt relief goals.
• Guide you through the entire court approval process, including accurately preparing and filing reaffirmation agreement documents and the reaffirmation agreement cover sheet.
• Advise on how reaffirmation might affect your ability to manage monthly expenses and rebuild your finances, including your savings accounts and checking accounts.

Our team has extensive experience helping clients, including individuals and some small business owners dealing with personal bankruptcy, make well-informed decisions about reaffirmation agreements and other bankruptcy basics. We will work with you to find a solution that aligns with your specific circumstances and aims for a stable financial future.

Final Thoughts

Reaffirmation agreements can be a helpful tool in bankruptcy, particularly when you want to retain essential property tied to a secured debt—such as a vehicle. By reaffirming the debt, you agree to continue making payments even after your bankruptcy case is discharged. However, this also means you remain personally liable for that debt, which can impact your financial fresh start.

Before entering into any reaffirmation agreement—whether for an auto loan or another type of credit—be sure you fully understand your options and the potential consequences.

Properly filing the agreement with the bankruptcy court is essential, and the decision should not be made lightly. Consulting with a bankruptcy attorney can help you evaluate your situation and choose the path that best supports your long-term financial recovery.

FAQs About Reaffirmation Agreements

What is a reaffirmation agreement in Pennsylvania bankruptcy cases?

A reaffirmation agreement is a legally binding contract that allows a debtor to continue paying a specific debt—typically a secured debt like a car loan—even after their bankruptcy discharge. In exchange, the debtor keeps the property tied to that debt. This agreement must be filed with and approved by the bankruptcy court.

Am I required to sign a reaffirmation agreement to keep my car in Pennsylvania?

Not necessarily. In some cases, you may be able to retain your vehicle by staying current on payments without reaffirming the loan, especially if the lender allows it. However, some lenders require reaffirmation to avoid repossession after bankruptcy. It’s important to discuss your specific situation with a bankruptcy attorney.

What are the risks of signing a reaffirmation agreement?

By reaffirming a debt, you remain personally liable for it—even after bankruptcy. If you later default, the lender can pursue collection actions, including repossession and lawsuits, and the debt won’t be discharged. It’s crucial to be confident you can afford the payments before signing.

Do reaffirmation agreements need court approval in Pennsylvania?

Yes. Reaffirmation agreements must be filed with the U.S. Bankruptcy Court and may require a hearing, particularly if you’re not represented by an attorney. The court must ensure the agreement won’t place undue hardship on your finances.

Can I change my mind after signing a reaffirmation agreement?

Yes. You can rescind (cancel) a reaffirmation agreement any time before the bankruptcy discharge or within 60 days after it is filed with the court, whichever is later. This must be done in writing and sent to both the creditor and the bankruptcy court.