What is a Reaffirmation Agreement?
In a Chapter 7 bankruptcy, you may be asked by a lender to sign a “reaffirmation agreement,” or “RA”, where you would agree to be fully responsible for a debt despite having filed for bankruptcy. The question of whether you should agree to a RA is a very complex one. In the vast majority of Maryland cases, I recommend that my clients not sign a RA.
When you “reaffirm” a debt in your bankruptcy, that debt will not be included in your discharge. This means that after your bankruptcy is finished, the creditor that you reaffirmed can continue to collect its debt from you as if you had never filed. There are benefits and disadvantages to RAs.
A reaffirmed debt will usually continue to be reported to the credit bureaus that you are paying on time (if that is the case). This will help you raise your credit score more quickly after your bankruptcy, so long as all payments are made on time. However, if any payment is made late, it will lower your credit score more quickly as well. In dealing with the creditor whose debt you reaffirmed, it will feel as if there was no change at all during and after the bankruptcy. In essence, that creditor is “left out” of the bankruptcy.
When you do not reaffirm a debt, after your discharge the debt is reported on your credit report as “included in bankruptcy” with a zero balance, regardless of whether you make future payments or do not. No additional reporting can be made. It also means that the debt is included in the discharge, and that the creditor can never force you to pay it. This does not mean either that you will lose your home or car, or that you get a free house or car, however.
If the creditor has a lien on your house (such as a mortgage or deed of trust) or on your car, it still has the right to enforce the lien if there is a breach. For example, if you do not reaffirm your house, you can keep it as long as the mortgage payments are kept current. But if you stop making payments, the lender can still foreclose and take your house (but is prohibited by the bankruptcy discharge from going after you for any deficiency). You can live in your house or keep the car as long as you make payments, and you can walk away at any time and the mortgage or car company cannot come after you (because you did not reaffirm). Sometimes when you do not reaffirm a car or house, the lender will not mail you monthly statements or allow you to pay online.
The law requires that, for the RA to be approved, either your attorney must sign it with you, or the Bankruptcy Court must approve it after a hearing. Your attorney's signature certifies that the RA (and the payments you have to make under it) will not create a hardship for you or your dependents. I almost never sign this statement, because in most Chapter 7 cases, my clients are barely scraping by, and I do not have a crystal ball. If I do not sign, there is a hearing before a Bankruptcy Judge to determine whether the RA would create a hardship. In most cases, particularly if your budget shows negative disposable income, the Court will reject the RA, but will still allow you to keep your home or car so long as all payments are made timely.
If the RA is approved, either by your attorney signing it or the Court approving it, and you cannot make all of the payments required (or those payments are late), you could lose your home or car, and the creditor could make negative credit reports and sue you for the remaining balance as if you had never filed for bankruptcy.
Depending on the type of loan, your attorney may make different recommendations to you in dealing with RAs.
Mortgages/Deeds of Trust. It is not necessary for you to sign a RA to keep your home, so long as mortgage payments, property taxes and insurance are kept current. Accordingly, in Maryland I will almost never recommend that a RA be signed reaffirming a mortgage or deed of trust.
Jewelry, Computers, Furniture and Consumer Goods. Most security interests (agreements where you pledge collateral for a loan) in jewelry, computers, furniture or other consumer goods are legally defective in some way, so that even if the lender were to try to recover the collateral, it could not. Even if the security interest were valid, the lenders virtually never seek to enforce it after your discharge (other than sending an occasional letter asking you to give the collateral back). Enforcing the security agreement would require the lender to hire (and pay) a lawyer, file a special type of lawsuit in state court called a “Replevin Action,” hire a process server to serve you with court papers, go to court, get a judgment, hire someone to repossess the item, go out to your house with a sheriff to take possession, pay storage fees, pay insurance for the item, hire an auctioneer to sell the item, advertise the sale, conduct the auction, and have the lawyer account for the proceeds. In the vast majority of cases, it simply is not cost effective for the lender to pay for all this, and in over 35 years of practicing law, I have seen it happen once, and that was for a $30,000 piece of jewelry (where it was cost-effective, but even there, only barely). And even if the lender were to file a replevin action, we can usually work out a settlement that is better than the terms of the RA.
Accordingly, I will almost never recommend that a RA be signed reaffirming jewelry, computers, furniture and other consumer goods.
Motor Vehicles. This is the most difficult area. Currently, all national car lenders, with the exception of Ford Motor Credit, will allow you to keep your vehicle, without signing a RA, so long as payments are kept current and the vehicle is properly titled and insured. Depending on the amount due, Ford will repossess unless you sign a RA. Some small credit unions also require the signing of a RA and will repossess if you do not.
Most lenders (other than Ford and some credit unions) have made the economic decision that they will make more money by allowing you to “retain and pay” without a RA, than by repossession and sale. This is so even though Maryland law allows a repossession without a RA because of a bankruptcy filing even if payments are current…provided that the lender refuses payments from you after the bankruptcy is filed. If it accepts post-petition payments, it may be considered to have agreed to “retain and pay” without a RA and would be acting improperly were it to repossess the vehicle.
Please note that these positions are subject to change at any time.
Accordingly, unless your vehicle lender is Ford or one of the few credit unions that do not allow “retain and pay”, we generally do not recommend signing a RA for a motor vehicle.
To summarize, without signing a RA, you can still continue to make your payments and keep your home and likely your car without any problems, but if you are unable for any reason (including illness, job loss, or domestic issues) to make timely payments, you can walk away from the debt without any liability, credit issues or worry. Likewise, in most cases it is very unlikely that a creditor would try to proceed with the expensive court proceedings that would be necessary for it to try to recover any secured personal property, such as furniture, computers, and jewelry.
I am sure that you believe you will not fall behind on your home or car payments, but you probably never expected to have to file bankruptcy in the first place. Unexpected problems can happen again, and I want to make sure that you are protected if they do.
For this reason, I strongly recommend against signing reaffirmation agreements in most cases.