Should I Sign a Reaffirmation Agreement?

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.

Image credit: Lori Greig/Flickr

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5 Comments

  1. This article was very helpful to me. It helped explain why my attorney did not ask me to reaffirm some of my mortgage dept. I was given forms for my car, which I signed, but none for my mortgage, that I continue to pay on time. (Bank of America said it was my attorneys job to get one to them. )
    I am having a hard time understanding why Bank of America would not rush to send me an affirmation agreement. What’s in it for them not to have me sign one?
    My Chapter 7 was discharge two years ago and I am just realizing the implicataions of what I did. It would have been nice to have had the information at the time, to make an informed decision.
    It might have been the same, to NOT sign reaffiramtion, but at least, I would have known all the good and bad consequences.
    Thanks for your valuable information, as I sort through it all.

    • BoA was wrong. There are cases holding that it is the creditor’s duty to prepare a reaffirmation agreement. I don’t know of any that say the debtor is responsible. It’s possible that BoA did not send you a reaffirmation agreement because it knew that it wasn’t necessary. Many lenders don’t even bother with reaffs for real estate. That’s usually good for the debtor.

      Thanks for reading!

      • Mr. Nason,

        I am a bankruptcy paralegal in Georgia, and I can tell you from my personal experience the neither Bank of American nor Wells Fargo will proactively send out a reaffirmation agreement to our office. It can literally take me hours, navigating their phone trees, to get to the right department and once I’ve requested the Agreement be sent, I usually have to follow up four to five times. It’s absolutely frustrating to have a client who wants to sign an Agreement, only to receive the Agreement after the discharge has been entered. In Georgia, you can only open a case to file a Reaffirmation Agreement if the Agreement was executed prior to the discharge entry. I would add that those client who do not reaffirm their primary mortgage usually end up getting blasted on their credit reports, as the mortgages end up being reported as discharged. That happens even if they faithfully make every single payment on time. There is one positive though; the initial filing indicating that a debtor wishes to reaffirm usually results in the bank contacting us for permission to speak with the debtor about loan modifications; even if they have refused to speak to them about that prior to the filing.

        • Thanks for reading, Karen.

          Here in Wisconsin, judges won’t reopen just to file a reaffirmation agreement. But creditors keep telling debtors that the lawyer messed up and must reopen the case to file the reaff months after case closing. “Frustrating” is putting it mildly.

          The credit reporting is accurate, though sometimes misleading. If no reaff was signed, the debt is properly reported as discharged in bankruptcy, even if payments are being made. One justification for that position: if the creditor reports payments being made and then the debtor stops making the payments, may the creditor report that the payments have stopped? Such a report *could* be a discharge or FCRA violation.

          But it’s a (theoretically) simple problem to get around. Once a year, the debtor can request a payment history from the lender. File a dispute with the CRA and send the payment history as an exhibit. When the CRA contacts the lender to confirm reporting, the lender will be hard-pressed to argue that the payment history it issued is incorrect. Therefore, the lender will usually ignore the CRA inquiry and the payment history should be entered into the credit report. Alternatively, the borrower could show that payment history to a new lender if refinancing to prove that payments have been made.

  2. Awesome summary! Thanks!

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