Reaffirmation Agreements in Bankruptcy:
What is a Reaffirmation Agreement in bankruptcy?
A person that files for a bankruptcy is called a debtor. If a debtor in bankruptcy has a car with a car loan secured by the car, the bank, finance company, or a credit union that holds that car loan, will ask that the debtor signs the car loan again as the debtor is emerging out of bankruptcy. This makes the car loan a new post-bankruptcy obligation for which the debtor is legally liable for even if he or she gets a discharge on all the other scheduled debt.
The new bankruptcy code the Bankruptcy Code (in Section 362(h)(1)(A)) states that the debtor has three options with car loans in bankruptcy: (1) surrender the car, (2) redeem the car - pay it in full, or (3) reaffirm the debt. Most debtors wish to keep the car and choose to not surrender but at the same time do not have the money to redeem it for fair market value in one immediate payment. This is why Reaffirmation Agreements are so popular. The car lender drafts a Reaffirmation Agreement and presents it to the debtor to sign. With a signed Reaffirmation Agreement the car lender can now sue the debtor upon default even after the debtor's bankruptcy discharge. In practice what happens is this: Upon default on a reaffirmed loan, the car lender will repossess the car, auctions it off, and then sues the debtor on the difference. The car lender gets a judgment against the debtor that the debtor no longer can discharge in another bankruptcy for eight years. More on why at our firm we do NOT recommend Reaffirmation Agreements and some alternatives later.