What Is a Reaffirmation Agreement?

A reaffirmation agreement is a voluntary agreement between a debtor and a creditor in which the debtor agrees to remain personally liable on a debt that would otherwise be discharged in bankruptcy. Normally, a Chapter 7 discharge eliminates the debtor's personal obligation to repay most unsecured debts. When a debtor reaffirms, the debt survives the discharge and the creditor can enforce it just as before. Debtors typically reaffirm debts to keep collateral such as a car or house, or to preserve a relationship with a lender such as a credit union.

Because reaffirmation cancels the fresh start for that specific debt, the Bankruptcy Code imposes strict requirements designed to protect debtors from pressure and from making unwise promises. Paralegals who assist bankruptcy attorneys often prepare these documents and track deadlines, making this a valuable exam topic.

Governing Law: Section 524(c)

Section 524(c) of the Bankruptcy Code lists the conditions for an enforceable reaffirmation agreement. If any requirement is not met, the agreement is unenforceable. The principal requirements include:

The agreement must be made before the discharge is granted.
It must contain clear and conspicuous disclosures about the amount reaffirmed, the annual percentage rate, and the debtor's rights, including the right to rescind.
It must be filed with the court, together with a statement of the debtor's income and expenses (Official Form 427 cover sheet in many cases).
The debtor must sign a statement that the agreement is voluntary, does not impose an undue hardship, and that the debtor understands its consequences.
The debtor's attorney, if the debtor is represented, must file a declaration or affidavit stating that the agreement represents a fully informed and voluntary agreement, does not impose an undue hardship, and that the attorney has advised the debtor of the legal effect and consequences.
The debtor has the right to rescind the agreement at any time before discharge is entered or within sixty days after the agreement is filed with the court, whichever is later, by giving notice to the creditor.

Court Approval and Undue Hardship

If the debtor is represented by an attorney during negotiation of the agreement, the attorney's declaration usually satisfies the court's oversight and no hearing is required. If the debtor is not represented by an attorney, the court must hold a discharge hearing and determine that the agreement does not impose an undue hardship and is in the debtor's best interest. A presumption of undue hardship arises when the debtor's monthly income less expenses, as stated on the schedules, is less than the scheduled payments on the reaffirmed debt. The debtor may rebut this presumption, for example by explaining that family members will contribute.

Special rules apply to reaffirmation agreements involving consumer debts secured by real property, such as a home mortgage. The court-approval requirement does not apply to a consumer debt secured by real property, although the other requirements still apply.

Chapter 7 Debtor's Statement of Intention

In a Chapter 7 case, the debtor who has secured consumer debts must file a statement of intention within thirty days of the petition or by the meeting of creditors, whichever is earlier. The statement indicates whether the debtor will surrender the collateral, retain it and redeem it, retain it and reaffirm the debt, or retain it and continue payments in some other lawful manner. The debtor must then perform the stated intention within thirty days after the first date set for the meeting of creditors, though the court may extend this period.

Alternatives to Reaffirmation

Redemption

Under Section 722, a Chapter 7 debtor may redeem tangible personal property intended for personal, family, or household use by paying the secured creditor the value of the collateral in a lump sum, rather than the full amount of the debt. Redemption is helpful when the car is worth much less than what is owed, though the lump sum requirement can be difficult.

Retain and Pay (Ride-Through)

Some debtors keep collateral and continue making regular payments without signing a reaffirmation agreement. Whether this is permitted depends on the circuit and the loan agreement, because the 2005 amendments limited ride-through. Many creditors will allow it informally if the debtor remains current, but the creditor may be entitled to repossess upon default under an ipso facto clause where state law allows. Debtors who do not reaffirm may remain personally free of liability for the debt.

Surrender

The debtor gives up the collateral and the debt is discharged, including any deficiency.

Chapter 13

In Chapter 13, debtors can often modify the treatment of secured debts, including cramdown of certain vehicle loans to collateral value, and repay through a plan without personal liability for reaffirmation.

Risks of Reaffirming

If the debtor later defaults, the creditor may repossess the collateral and sue for the deficiency since personal liability remains.
The debtor may be paying more than the asset is worth.
Reaffirmed debts cannot be discharged in a later bankruptcy case within the eight-year bar to Chapter 7 refiling, except in limited situations.
Reaffirmation may harm the debtor's budget and fresh start.

The attorney should review the debtor's finances and advise on whether reaffirmation is wise.

Common Violations and Consequences

A creditor who pressures a debtor to sign an unenforceable reaffirmation agreement, or who tries to collect a discharged debt without an enforceable agreement, may violate the discharge injunction under Section 524(a). Remedies include contempt sanctions, actual damages, and attorney fees. Creditors may also not condition the continuation of a loan or lease on reaffirmation of an unrelated debt in a manner that violates the Code.

The Paralegal's Role

Reviewing proposed agreements for required disclosures
Gathering income and expense information for the supporting statement
Calendaring statement of intention and rescission deadlines
Preparing drafts of the attorney's declaration for attorney review and signature
Filing documents with the bankruptcy court and tracking the discharge date
Communicating with creditors' counsel under attorney direction

Remember that only the attorney can advise the debtor on whether to reaffirm.

Frequently Asked Questions

Is reaffirmation required to keep my car?

Not always. Some debtors can redeem, keep paying under the loan terms, or use Chapter 13. The options depend on the lender, the circuit, and state law.

Can a debtor cancel a reaffirmation agreement?

Yes. A debtor may rescind before discharge or within sixty days after the agreement is filed, whichever occurs later.

Does the court always hold a hearing?

No. A hearing is required mainly when the debtor is unrepresented, or when the attorney cannot certify no undue hardship.

What happens to the debt if reaffirmation is not approved?

The agreement is unenforceable and the debt is discharged, subject to the creditor's lien rights on the collateral.

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Reaffirmation Agreements in Bankruptcy: Requirements, Risks, and Alternatives