Man with sword

The Reaffirmation Agreement – Beware the Double-Edged Sword

If you file for bankruptcy and have an auto loan or mortgage (or even bought some furniture on credit), you’ll likely be asked to sign a reaffirmation agreement. What’s a reaffirmation agreement you ask? Well, pull up a chair and let me tell you. It’s something that debtors in bankruptcy should not take lightly.

What is a reaffirmation agreement?

A reaffirmation agreement is just as its name implies: it’s an agreement between you and your lender in which you agree to pay the debt back. In return, you get to keep the furniture, car, truck, house or other property that you borrowed money (or financed) to purchase. As an incentive for signing, creditors often promise to report to the credit bureaus your post-bankruptcy payments. This may help speed-up the credit repair process.

So what’s the risk in signing a reaffirmation agreement?

So you’re thinking, “Great, I get the keep the property AND help rebuild my credit at the same time. What’s not to like?” Well, as they say, there ain’t no such thing as a free lunch.

One of the main tenants of the bankruptcy process is to allow debtors a financial fresh start. In order to accomplish this, bankruptcy law allows for the discharge of a vast majority of debt. But, by signing a reaffirmation agreement, you’re agreeing not only to allow the creditor to exercise its right to take and sell the property if you fail to make your payments, but to allow them to sue you for the debt as well. In other words, you’re still on the hook for the reaffirmed debt even if you receive a discharge in bankruptcy.

That, in of itself, should be enough to make you pause and seriously consider whether to sign on the dotted line. Something else to consider is whether the property is really worth keeping. For example, I see many debtors with auto loans way in excess of what their car or truck is worth. Oh, and often with double-digit interest rates. So why not take the opportunity to shed this debt and find a newer, more reliable vehicle with a loan more in line with its value (and your pocketbook)? For many, it’s fear that they can’t get an auto loan. Believe me, there are plenty of dealers out there more than willing to work with individuals emerging from bankruptcy.

Reaffirmation agreements can be useful tools. They ensure that as long as you are making your payments, the lender won’t exercise its right to take your property. They are also useful for rebuilding your credit. However, keep in mind that the sword can cut both ways. If you sign and fail to pay, the lender can not only repossess the property, but it can also sue you for the debt regardless of your discharge in bankruptcy. Ultimately, it’s your decision, but it’s not a decision to be made lightly.