In a bankruptcy setting, a reaffirmation agreement is a type of contract set forth between a debtor and their creditor. Some bankruptcy proceedings, such as Chapter 7 filings, discharge certain debts through the bankruptcy process. A reaffirmation agreement basically states that the debtor will pay some or all of the debt instead of having it discharged. This may be a choice to consider as it can often have better effects on the debtor’s credit in the long run.

Why Would a Debtor Sign a Reaffirmation Agreement?

A reaffirmation agreement basically reinstates the borrower’s obligation to repay the debt in full. In return, the lender promises not to foreclose on the borrower’s property or to repossess any property that has been designated as collateral on a debt. This promise remains in effect so long as the borrower continues to make good on their scheduled payments.

What Are the Requirements for a Valid Reaffirmation Agreement?

Requirements for a valid reaffirmation agreement include:

  • The court must receive the agreement before the debtor has received a discharge on the debt
  • The agreement must be entered into in a voluntary manner
  • In some cases, the debtor must be able to cancel the reaffirmation agreement within two months of filing with the court

If only one side is represented by a lawyer but the other is not, the bankruptcy court must verify that this will not cause any serious problems for the unrepresented party. However, it is best if both parties are represented by lawyers.

What If the Debtor Continues Making Payments without Court Approval?

In some cases, the debtor continues making payments during bankruptcy and the creditor doesn’t repossess the property. The parties act as though the debtor never filed for bankruptcy. In many respects, the debtor has an informal reaffirmation agreement during the bankruptcy itself. This is known as a “ride through agreement.”

Ride-through agreements are controversial. Ride-through agreements operate without the sanction of the Bankruptcy Code. Further, the debtor may be foregoing opportunities to lower the amount the debtor has to pay.

During bankruptcy, debtors can often reduce the value of the property down to fair market value (FMV) instead of current value. If the FMV is lower than the current amount the debtor owes, ride through agreements, and reaffirmation agreements, would be unwise.

What If a Reaffirmation Agreement Is Violated?

In most cases, a reaffirmation agreement creates a legal obligation for the debtor to pay back the entire agreed-upon amount. Thus, a violation can occur if the borrower fails to make repayments as specified in the agreement. This can result in the lender repossessing some of the borrower’s property. If such measures do not fully cover the debt, the lender can sometimes file a personal judgment against the borrower to obtain the remaining amounts.

Similarly, a lender can violate an agreement by attempting to enforce collections or take actions that are not covered in the agreement. Also, the use of fraud or misrepresentation to gain the borrower’s agreement may lead to legal action. These may result in judgment against the lender.

Do I Need an Attorney for Help with a Reaffirmation Agreement?

Reaffirmation agreements create binding legal obligations for both parties. It is especially important for the borrower to pay attention to the terms, as they will once again be required to repay the debt in full. You may wish to hire a bankruptcy lawyer if you need assistance with a reaffirmation agreement. Your attorney can help you draft and review the agreement terms before you sign it. Also, if there is a dispute over a violation, your attorney can provide you with representation in court if needed.