Reaffirmation Agreements in Chapter 7 Cases

A "reaffirmation agreement" is a contract between you and a creditor in your Chapter 7 bankruptcy case.  Signing this contract prevents the debt you have with a specific creditor from being discharged. Why would I sign a reaffirmation agreement? Individuals usually sign reaffirmation agreements for a few reasons.  First, reaffirmation agreements usually involve secured creditors.  A secured creditor is a creditor who has lien on at least one of your assets.  For example, if you own a home, the creditor you are making mortgage payments to is a secured creditor.  If you do not make mortgage payments, that creditor can sell your house through a foreclosure action.  Individuals sign reaffirmation agreements with secured creditors because they want to keep making payments and they want to keep the asset a creditor has a lien on. Second, individuals sometimes reaffirm debts because it can help them build their credit after discharge.  Mortgages and car notes are debts that, if paid on time, are often given more weight by the major credit reporting bureaus.  Mortgages and car notes tend to be big, long term debts.  Therefore, keeping these debts and continuing to make payments on them after getting your Chapter 7 discharge is a good way to begin the process of rebuilding your credit. Why would I not sign a reaffirmation agreement? Signing a reaffirmation agreement can be risky. The main reason most people file a Chapter 7 is to get out of debt.  Signing a reaffirmation agreement defeats that purpose by keeping a debt that could otherwise be discharged.  Here are some important things to consider before signing a reaffirmation agreement: First, if you fall behind on payments and a creditor does repossess or foreclosure on your asset, you can be liable for money still owed after that asset is sold.  For example, many homeowners in Wisconsin owe more on their homes than the home is worth.  Thus, if you fall behind on your mortgage and lose your home in foreclosure, the bank will get less from the sale of your home than what you owe.  So, if your home sells for $70,000 but you owed the bank $100,000, you can owe the bank $30,000.  Therefore, signing a reaffirmation agreement can be risky because, if one day you fall behind on your payments, you can be liable for a large debt.  It is often difficult to predict what the future holds financially, and putting yourself at risk by signing a reaffirmation agreement can undermine the benefits you receive from the Chapter 7 discharge. Second, there are often alternatives to signing a reaffirmation agreement.  Most creditors will continue to accept your payments even if you don't sign a reaffirmation agreement.  Why? Because it is often the case that a creditor would rather accept your monthly payments that go through the expense necessary to repossess or foreclose one of your assets. Deciding whether to sign a reaffirmation agreement is an important decision.  Having an attorney help guide you through the process is often of critical importance.  We are here to help our clients understand how reaffirmation agreements work, and to give advice about whether signing a reaffirmation agreement makes sense for you.