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Reaffirmation Agreement Questions and Answers

The Frequently Asked Questions piece that follows is reproduced, with permission, from the original written by Brian W. Peters of the Kintzinger Law Firm, Dubuque, Iowa.
Copyright (c) 2011 by Brian W. Peters, All rights reserved.

This document gives general answers to questions that are frequently asked by our clients. It is intended for clients of this office, and is not intended as a substitute for our advice in individual cases. You also should understand that the law regarding reaffirmation agreements changes from time to time; we believe the information below was accurate when written, but we cannot guarantee that it will remain correct over time. We do hope that it will be a useful background, and a way to think about questions to ask us directly.


Q. What is a reaffirmation agreement?

A. A reaffirmation agreement is a document filed with the bankruptcy court which allows a creditor to sue you to collect money owed to them. Without this agreement, at the end of a typical bankruptcy case, you receive a discharge -- a court order that prohibits creditors from suing to collect money from you. 

Q. Who benefits from a reaffirmation agreement?

A. Unless the creditor gives you better terms on the loan, nearly all the benefit is to the creditor. 

Q. I'm not clear yet -- tell me a story?

A. Cain and Able are twins, and each has a motorcycle loan with Big Bank: $22,000 loans on $18,000 bikes. Cain reaffirms, Able does not, but each continue to make all the payments on time. Six months later both are sideswiped by a truck with "Murphy's Law" stenciled on the side. Both are laid up, and neither can make payments on the motorcycle loans. Big Bank repossesses the bikes, and sells them for $15,000 each. Big Bank then sues Cain for $7,000 and begins searching for ways to garnish Cain. Able just loses the bike. 

Q. Will it improve my credit score?

A. By itself, no. One of the heavy selling points from creditors urging reaffirmation agreements is that without it they won't report your on-time payments to credit reporting databases -- and that the report of your sterling record of on-time payments can improve your score. While that may be true, they also won't report late or slow payments to credit reporting databases, and that kind of information will damage your score. 

Q. If I sign the reaffirmation agreement, is the creditor required to make future loans to me?

A. No. 

Q. If I sign the reaffirmation agreement, is the creditor required to renegotiate if I hit a bad spot and temporarily can't make payments?

A. No. 

Q. If I don't sign the agreement but make all the payments on time, can I keep the car or house that the loan is secured by?

A. Yes. So far there is not a single Iowa case indicating that a creditor can repossess consumer property if all payments have been made on time. Of course, if you do not make all the payments on time they can repossess the collateral, but that's true regardless of whether you reaffirm or don't. If you don't reaffirm they can't sell the collateral for less than the loan balance and sue you for the difference. 

Q. Is maintaining a good credit relationship with the lender enough reason to sign a reaffirmation agreement?

A. This has to be your call. If this is your community bank, or your local credit union, where folks who know you make the lending decisions, and this is a loan in a reasonable amount you will have no trouble paying, that might be a good strategy. As a cautionary note, you should remember that a lot of community banks have suddenly become regional banks, and a lot of local credit unions have merged, and the new decision makers may not remember you in the same way, or may not remember you at all. If this is a regional or national creditor, you should probably count on the fact that their institutional memory of your good deed will be brief, and that any new lending will be based on their then-current standards, and not on whether you previously reaffirmed. 

Q. Will the court hold a hearing on the agreement?

A. Unless your budget indicates that you can afford the payment, and your attorney signs the agreement, the court will hold a hearing on the reaffirmation agreement to be sure that the agreement is in your best interest. 

Q. Can I change my mind about the agreement?

A. Yes. For sixty days after the agreement is filed (or until the date of the discharge, if that is later) you can revoke the agreement. 

Q. How should I think about the process of entering into a reaffirmation agreement?

A. Think of it as a new loan. You want to negotiate the best possible terms, be sure that you really want the property that you're buying, and be sure that the payments are in an amount that you can make even in a bad month. 

Q. Why are debtors attorneys and the bankruptcy court so suspicious of reaffirmation agreements?

A. Many people feel very vulnerable when a bankruptcy is filed. Panic, pride, and a fear of the unknown can leave you scrambling to reassemble a familiar financial landscape -- including your old, familiar debts. But doing that can deprive you of one of the big benefits of filing a bankruptcy, which is a reasonably fresh start on your finances. Ideally, giving you six months or a year to recover emotionally and financially, and to see what your fresh start has gotten you, would put you in the best position to make a thoughtful decision about a reaffirmation agreement. Our concern is that, a bit too often for comfort, reaffirmation agreements are "sold" on the basis of fear that you will "never again have credit," or that "everything will be taken from you." We can't give you the extra time, but we can try to give you as much perspective as possible when you're making the decision on this new loan.


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