Choosing whether to enter into a reaffirmation agreement with your secured creditors is one of the most important decisions you will make during the course of your bankruptcy. The pros and cons must be carefully weighed.
On the one hand, reaffirming a debt affords you a level of certainty, knowing your property will not be repossessed or foreclosed, and providing clarity regarding the payoff balance, monthly payment, interest rate and terms. Additional benefits include the potential to negotiate a better deal during the reaffirmation process and the opportunity to rebuild your credit. Once you re-assume your obligation and make timely payments, those payments will be reported to the credit bureaus thus setting the course for improving your credit in relatively short order.
On the other hand, reaffirming a debt means re-obligating yourself to make those installment payments. Any default on your part could subject you to any and all collection activities, including garnishing your wages.
Once you decide to move forward with reaffirming your secured debt, you must take steps to ensure the reaffirmation agreement is in writing, and signed by all parties and approved by the bankruptcy judge. Simply checking the “reaffirm” box on your bankruptcy Statement of Intention is not sufficient and will not result in a positive signal on your credit profile, nor will it result in any improvement in your credit score.
You and the creditor must execute a formal reaffirmation agreement which documents that you can manage the reaffirmed payment amount. Your attorney must also sign the agreement and state that he or she believes that the reaffirmation agreement is in your best interest. Absent a written reaffirmation agreement, you have no legal obligation to pay and therefore any payments made will have no affect on your credit report.
There is a silver lining, even in bankruptcy. Throughout the reaffirmation process, you may be able to negotiate more favorable terms. Reaffirmation is a new contract between you and the creditor, and need not mirror the terms of your original agreement. Many debtors have successfully negotiated for reduced payoff balances, lower interest rates, or lower monthly payments on contracts for vehicles, furniture, mortgages and home equity lines of credit.
Some lenders are more willing to negotiate these terms than others. While some stubbornly cling to a “non-negotiable” policy, others will see the value in retaining you as a customer and continuing to collect your monthly payments, rather than repossessing and liquidating the underlying collateral for the loan. You never know until you ask, and it is probably best if you have an attorney handle the negotiations on your behalf.
You may cancel a reaffirmation agreement within 60 days after the agreement is entered or your bankruptcy case is closed, whichever comes first. Once you enter into a reaffirmation agreement, it is critical that you fulfill your obligations under the new contract. Doing so will protect your property from repossession, and rebuild your credit score so you can recover from your bankruptcy as quickly as possible.