Reaffirmation

Reaffirmation summary:

• A reaffirmation agreement is when you voluntarily continue to pay a secured debt that would otherwise be included in your bankruptcy.

• When you reaffirm a debt and make the required payments, you can typically keep the collateral on the loan.

• Your payments on the reaffirmed debt could have a positive impact on your credit score.

Reaffirmation Definition and Meaning

Reaffirmation is an arrangement between a debtor and a creditor during bankruptcy proceedings. The debtor (the person who owes the money) agrees to continue payments on a secured debt in order to keep the collateral. 

A secured debt is one that’s guaranteed by collateral (something valuable) that the lender could take if you default. For example, a car loan is a secured loan. The car is the collateral. If you don’t pay your car loan, the lender could take the car.

Reaffirmation is most commonly used during Chapter 7 bankruptcy, during which some or all of the debtor's assets may be liquidated (sold). When you file Chapter 7, you have to let the court sell the things you’re not allowed to keep. The money is distributed to your creditors before any debts are discharged. 

How Reaffirmation Works

During Chapter 7 bankruptcy, you’re required to give up any non-exempt property and allow it to be liquidated (sold and used to at least partially repay your creditors). In return, your eligible debt is discharged (forgiven), meaning you’re not legally obligated to pay that debt anymore.

If you discharge a secured debt, such as an auto loan, the lender may get the collateral. In the case of an auto loan, the lender could repossess your vehicle after the debt is discharged in bankruptcy.

Reaffirmation gives you a way to keep the collateral tied to a secured loan. When you reaffirm a debt, you agree to continue payments and to still be responsible for that debt. No part of the debt is discharged or forgiven in the bankruptcy. The lender doesn’t seize the collateral as long as you make the required payments.

Key Aspects of Reaffirmation

A reaffirmation agreement is entirely voluntary. To make a reaffirmation agreement, you typically need to be current on your payments for that debt.

Reaffirmation is also only an option if it won’t cause you further financial hardship. If you have a bankruptcy attorney, your attorney can submit a declaration with the court stating that the agreement won’t cause financial hardship to you. If you’re representing yourself in your bankruptcy filing, reaffirmation agreements require court approval.

The main benefit of reaffirmation is the opportunity to keep your property. For example, if you have a mortgage, you could reaffirm the debt to avoid losing your home.

In addition, reaffirmation could help rebuild your credit score. When you reaffirm a debt, the credit bureaus make a note on your credit history that you’re paying the account. Your payment history will go on your credit report and could have a positive impact on your credit if you make your payments on time. You need to go through the reaffirmation process with the court for your payments to be recorded.

When to Request a Reaffirmation Agreement

When you reaffirm a debt, you take on more financial responsibility. Here are a few questions that could help you decide whether to request a reaffirmation agreement:

• Do you need the item? If so, reaffirmation may be a good option to protect that property.

• Can you afford to make the payments? Only reaffirm a debt if you’re 100% sure you can meet the payment obligations.

• Is there a co-signer on the debt? When you discharge a debt in bankruptcy, the creditor could still go after a co-signer. You may want to choose reaffirmation if discharging the debt could cause issues for your co-signer.

A reaffirmation agreement is only made during bankruptcy proceedings, and normally Chapter 7 bankruptcy. If you haven’t filed for bankruptcy, there could be other options to get rid of debt, such as a debt relief program.