What is a Reaffirmation Agreement and should you sign one?

You need to understand the implications before you sign

When you file a bankruptcy, you have to think about many things in a different way. For instance, your vehicle may be an important part of your bankruptcy, as automobiles and homes tend to be the two largest debts that typically have a security interest attached. A security interest, as its name implies, provides security for the creditor should you fail to make payments on their loan.

And this is what permits their repossession your vehicle or foreclosing on your home when you fall behind on the loan payments. Many borrowers fall behind on their monthy vehicle loan payments and that may be one of the reasons they are filing bankruptcy. If you can no longer afford your vehicle, you may have to surrender that vehicle to your creditor.

Vehicles are important in California

However, for many people in the Bay Area, having a vehicle is necessary to maintain a job and earn the income they need to pay their bills. So, if you are in a bankruptcy, say because of medical debts, you may be current on your vehicle's payments and you need to keep the vehicle so that you can get to work.

With secured property, like a vehicle, your creditor has a right to repossess your vehicle (the security for the loan) should you fail to make your loan payments. Once they repossess the car or truck, they will sell it at an auto auction.

Unfortunately, vehicles depreciate rapidly and it is likely that the auction value of the car or truck will be substantially less than your remaining loan balance. This means after the auction sale, there will be a deficiency balance remaining.

That creditor can then begin collection proceedings against you to recover that deficiency.

And this is what a bankruptcy discharge protects against. When you file a bankruptcy and receive a discharge, it is this remaining personal debt that you may owe from a deficiency balance that becomes uncollectable.

Reaffirm or retain?

However, if you file a bankruptcy and are making your payments on your vehicle, in most cases, your creditor will likely hope your keep making your payments and you keep the vehicle. This is because they are likely to suffer a significant loss if they repossess and sell your vehicle. However, some creditors will insist you reaffirm if you intend to keep the vehicle.

What they would really like is for you to sign a document that is known as a Reaffirmation Agreement. This document, signed after your bankruptcy is filed, in essence, "reaffirms" your indebtedness.

If you execute a reaffirmation agreement on your car loan, even if you receive a discharge, you could still be held personally responsible for any deficiency balance should you fall behind sometime in the future and the creditor repossesses the vehicle. Reaffirmation agreements must be approved by the bankruptcy court.

You can also sometimes do what is known as "Retain" a vehicle. To retain, you simply keep making payments. Because you have not reaffirmed your debt, should you lose the vehicle in a year or two due to an inability to pay, the creditor has no recourse against you personally for the deficiency balance. Some creditors claim they will not permit this practice.

Before you decide, you should discuss this issue with your bankruptcy attorney. They can examine your circumstances and explain the consequences of your options, allowing you to make a decision that is in your best interest, not that of your creditor.