A reaffirmation agreement in bankruptcy is a form agreement between a debtor and a secured creditor, such as a vehicle lender. The debtor agrees to pay back a specific debt and “get back on the hook”, even after receiving a bankruptcy discharge. In return, the creditor promises not to repossess the collateral associated with that debt so long as the debtor stays current with payments. Reaffirmation agreements are available in Chapter 7, not Chapter 13.
A binding reaffirmation agreement in bankruptcy causes the debtor’s discharge to be “null and void” for the reaffirmed debt. The end result is if the debtor defaults after entering into a reaffirmation agreement, the creditor may sue that debtor. Essentially, the bankruptcy becomes meaningless with respect to the reaffirmed debt.
Why Enter into Reaffirmation Agreements?
The main reason to enter into a reaffirmation agreement in bankruptcy is to retain the secured vehicle. Before Congress amended the Bankruptcy Code in 2005, a debtor could retain a vehicle if they simply continued to stay current with payments. If the debtor ever stopped paying, the lender could repossess the vehicle. However, the Chapter 7 discharge still prevented the creditor from suing the debtor. This was known as the “retain and pay” or “ride-through” option.
In 2005, Congress got rid of this easy “retain and pay” option. Congress amended the Code to require debtors who wanted to retain their vehicles to “get back on the hook” for the debt by signing a reaffirmation agreement. As the law stands today, if a debtor does not execute a reaffirmation agreement, the lender may repossess the vehicle simply because the debtor filed Chapter 7, even if the debtor is current with payments. The creditor can essentially “punish” a debtor for filing Chapter 7 by repossessing the vehicle while payments are current.
Should You Enter into a Reaffirmation Agreement?
Deciding whether to reaffirm a debt is a critical choice. The main reason to execute a reaffirmation agreement is to comply with the Code’s requirement so that the lender does not repossess the secured vehicle, even if the debtor stays current.
Furthermore, a debtor may choose to reaffirm if the lender grants “concessions”, such as reducing the debt or interest rate. For example, say you owe $25,000 on the vehicle at 12% interest. If the lender is willing to reduce the debt to $18,000 at 6%, it may be worth signing a reaffirmation agreement and “getting back on the hook” for the debt. Of course, it depends on the concessions, and the lenders rarely grant favorable deals. Again, every case is different. A debtor must always have a competent Arizona bankruptcy lawyer during this process. Every case is different.
Reaffirmation Agreements and Credit Scores
Some people believe that entering into a reaffirmation agreement will improve their credit score after bankruptcy. This is one of the biggest myths regarding bankruptcy. In the case In re Anzaldo, 612 B.R. 205 (Bankr. S.D. Cal. 2020), a court had a trial to determine if a reaffirmation agreement helped rehabilitate a credit score. An expert testified that the impact of a reaffirmation agreement on a debtor’s credit score is “none if very low”. The expert also testified that reporting missed payments after executing a reaffirmation agreement would actually lower the debtor’s credit score.
The court noted the lack of reliable information about whether a reaffirmation agreement improves a person’s credit score. The court held that reaffirming a debt did not help debtors rebuild their credit. In fact, the court stated that the credit bureaus or some agency should articulate and spell out how reaffirming a debt could help a credit score. No evidence showed that reaffirming a debt helped.
Can You Retain a Vehicle Without a Reaffirmation Agreement?
In Arizona, maybe. The Bankruptcy Code requires a debtor to do two things to keep a vehicle with a loan. First, a debtor must file a “Statement of Intention” when filing bankruptcy stating a desire to retain the vehicle and reaffirm the secured debt. Second, a debtor must timely execute and file the reaffirmation agreement during the bankruptcy case. Unless a debtor’s attorney also signs the reaffirmation agreement, the court must hold a hearing. The court will determine whether the reaffirmation agreement is an “undue burden” for the debtor. And in most cases, the court will deny the reaffirmation agreement for causing the debtor an undue burden.
However, there is a notorious Arizona case In re Moustafi, 371 B.R. 434 (Bankr. D. Ariz. 2007). An Arizona bankruptcy court held that a debtor may retain the vehicle, even if the court denies a reaffirmation agreement. In a nutshell, the Court found that it wasn’t the debtor’s fault that the court refused to approve it.
In other words, Moustafi resurrected the “retain and pay” option that was available before Congress amended the law in 2005. If a debtor signs a reaffirmation agreement that the bankruptcy court disapproves, the lender may not repossess the vehicle. Of course, the debtor must remain current with payments. But the debtor gets the best of both worlds. If payments stop at any time in the future, the only remedy is for the creditor to repossess the vehicle. Under Moustafi, because the court disapproved the reaffirmation agreement, the bankruptcy discharge still prohibits the creditor from suing the debtor.
It seems counterintuitive to sign a reaffirmation agreement with the hope that the court disapproves it. The debtor is trying to keep the vehicle without getting back on the hook for the debt. Blame Congress.
What About Reaffirmation Agreements for Mortgages?
Unlike vehicle creditors, mortgage lenders cannot foreclose on your home if you don’t execute a reaffirmation agreement. In other words, the “retain and pay” option for mortgages still remains in the Code.
A couple of lenders will falsely claim that if a debtor doesn’t reaffirm the mortgage, the lender cannot offer a loan modification. The debtor frequently learns this years after filing bankruptcy. The lender sometimes has the gall to blame the debtor’s attorney for not giving the debtor the option to reaffirm.
This is hogwash. First, unlike vehicle lenders, mortgage lenders rarely send reaffirmation agreements to debtors after the bankruptcy filing. Second, there is nothing in the law that requires a reaffirmation agreement for a debtor to qualify for a mortgage modification. Nothing. Third, even if a debtor executed a reaffirmation agreement, the bankruptcy court would most likely not approve it. The whole point of bankruptcy is to discharge debt. A mortgage is usually a person’s largest debt. Approving a mortgage reaffirmation agreement would make the bankruptcy discharge “null and void” with respect to the debtor’s largest debt. It makes no sense.
Sometimes a mortgage lender will encourage a debtor to reopen the bankruptcy case to file a reaffirmation agreement so the debtor can get a loan modification. The Bankruptcy Code does not allow this. Once a debtor receives a discharge, it is too late to file a reaffirmation agreement.
My advice is to go to another bank if their current lender refuses to grant a loan modification. If you qualify for a loan modification, you most likely will qualify for a refinance with a different lender.
Congress should amend the Code to prevent this kind of bad faith by mortgage lenders.
When Must a Debtor Sign a Reaffirmation Agreement?
Debtors typically negotiate reaffirmation agreements during the bankruptcy process. Consult with your Arizona bankruptcy attorney to determine the best timing. However, once a debtor receives a bankruptcy discharge, it is too late to file a reaffirmation agreement. Our Arizona bankruptcy courts routinely refuse to reopen cases to allow a debtor to file a late reaffirmation agreement.
Can a Debtor Cancel a Reaffirmation Agreement?
Yes, under certain circumstances, you can cancel a reaffirmation agreement for a short time after you file it. However, by the time the lender files a lawsuit after the debtor stops making payments, it is way too late. This is a prime example why every debtor should have a competent Arizona bankruptcy lawyer.