Reaffirmation

Reaffirmation summary:

• Reaffirmation means agreeing to continue payments on a secured debt after bankruptcy.

• In exchange for reaffirming a debt, you won't have to surrender the loan's collateral

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• Some lenders will let you keep your collateral if you continue making your loan payments. 

Reaffirmation definition and meaning

Reaffirmation is a deal between a debtor and a secured creditor that's made after the debtor has filed for bankruptcy. In this agreement, a debtor promises to pay a debt even after the bankruptcy case is finished. For example, you might sign a reaffirmation agreement to keep making your car loan payments so you don't have to give up your car.

Key concept: 

Reaffirmation is an agreement with a secured creditor to continue paying the debt even after bankruptcy. 

More about reaffirmation

Bankruptcy helps you get rid of debt by ending the agreement with your creditors. But sometimes you want to keep a loan, especially if it’s for something important like a car.

The reaffirmation agreement lets you keep paying on a secured debt

It helps if you're current on your loan payments before you try to reaffirm the debt. Some lenders might agree to new terms, but they don’t have to. So, it’s best to be current on your payments before you file for Chapter 7

To reaffirm a debt, the asset has to qualify as exempt

Suppose your state's bankruptcy law allows you to exempt $5,000 in equity in a car. Your car is worth $20,000, and you owe $16,000. That means you have $4,000 in equity, which is under the limit. You can reaffirm the debt. 

What if you owe just $10,000? You would have $10,000 in equity. In this case, you can’t keep the car. Your bankruptcy trustee will take the car, sell it, give you $5,000 (the allowed exemption), and use the rest to pay your creditors. 

Reaffirmation: a comprehensive breakdown

Reaffirmation sounds simple, but it's more complicated than it might seem. If you reaffirm a debt, you're obligated to repay it no matter what. If you can't keep up the reaffirmed payments after your bankruptcy, your lender can repossess the car and sell it. If your lender doesn't get enough money to cover what you owe, you’re responsible for paying the difference. 

Sometimes, a lender will let you keep a car or other property without signing a reaffirmation agreement, as long as you keep making your payments. This is the best option because if you can’t make the payments down the road and return the car to the lender, you won’t owe any more money.

If you sign a reaffirmation agreement, things are different. You'll still owe the debt even after your bankruptcy is over. You should only consider reaffirming a debt if:

• The lender requires it.

• It’s the only way to keep the property you need.

• You're sure you can pay off the debt.

Reaffirmation might be the only way to keep important things like a car or your home in a Chapter 7 bankruptcy

If you decide to reaffirm a debt, you could ask the lender to accept a smaller amount as full payment. For most people, it’s not a good idea to reaffirm a debt for more than what it would cost to replace the property.