Bankruptcy filers with secured debts will likely be offered reaffirmation agreements by their secured creditors. Your bankruptcy discharge will eliminate your personal liability on most secured debts, but liens on your property will remain. (See this post for the differences between secured and unsecured debts.) This means that secured creditors can enforce their liens through repossession if you default on the loan, but they cannot sue you for any money. The most they can get is their collateral.
A reaffirmation agreement reimposes the personal liability that would otherwise be discharged in your bankruptcy. By signing, you agree that if you default on the loan, the secured creditor can both repossess its collateral AND sue you for the balance due on the loan. Whether to sign a reaffirmation agreement is a serious decision, and the state in which you live is a factor. Your bankruptcy attorney can give you advice for your specific situation, but here is a general list of pro’s and con’s.
PRO (reasons for signing)
• The secured creditor will report all of your post-bankruptcy payments to the credit reporting agencies, helping you rebuild your credit sooner.
• The secured creditor won’t try to repossess or foreclose as long as you continue making your payments.
• The secured lender may offer a better interest rate in exchange for your signature.
The first two items are easily handled without a reaffirmation agreement:
• If you don’t reaffirm the debt but want the credit reporting agencies to show you’ve been making your payments, you can request a payment history from your lender once per year. You can submit that report to the credit reporting agency to have your credit report updated or you can submit it to any lender from which you are applying for credit.
• A mortgage lender can’t foreclose on your home in Wisconsin unless you default on the loan, even if you don’t sign a reaffirmation agreement. A vehicle lender is a slightly different story. If the Wisconsin Consumer Act applies to the loan, the creditor cannot repossess without a default in payments. Although this law is unambiguous, some judges choose to ignore the language of the Act and may allow a creditor to disregard the creditor responsibilities included in the WCA. If a creditor tried to repossess your vehicle solely because you chose not to sign a reaffirmation agreement, I believe you would win that fight in most Wisconsin circuit courts. But there are no guarantees; you could lose the suit (and the vehicle). Even if you won, you would end up paying legal fees to have an attorney argue your case for you.
CON (reasons for not signing)
• If you default on the loan, you’ll lose the collateral PLUS you can be sued for a deficiency if the collateral is worth less than the balance on the loan. Can you say for sure that nothing will happen in the next few years that will cause you to default?
• Your bankruptcy discharge will eliminate the personal liability and the ability of the creditor to sue you for anything other than return of the collateral. If you sign a reaffirmation agreement, you give back that benefit without getting anything in return.
Because reaffirmation agreements rarely benefit the debtor, I usually discourage clients from signing them. Before making this important decision, be sure to discuss the issue with your attorney.
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