What are the disadvantages of signing 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.

Reaffirmation Agreements in Chapter 7 Cases

Here are some additional resources regarding reaffirmation agreements:

Nolo's Reaffirming Secured Debt in Chapter 7 Bankruptcy

U.S. Federal Courts' standardized reaffirmation agreement form can be accessed by clicking here.

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. In other words, this contract allows you to treat a debt as if you hadn't filed for bankruptcy. Once you have filed a Chapter 7 bankruptcy petition, deciding whether to reaffirm debt is often one of the most complicated and important decisions you will have to make during your case. Usually, you will be deciding whether to sign secured debts such as mortgage loans, car loans, or other debts secured by collateral you own.

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.

What are the benefits of signing a reaffirmation agreement?

  • First, reaffirmation agreements usually involve creditors that you have an important, long term relationship with. A secured creditor is a creditor who has lien on 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 their relationship with their mortgage company in good standing.
  • Second,individuals sometimes reaffirm debts because it can help them try to raise a credit score after bankruptcy.  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 types of debts in good standing can be a good way to build credit.