What Is a Reaffirmation Agreement?

Sarah Edwards | May 04, 2023

Edited by Hannah Locklear

When you’re suffering from grave financial problems and can’t see a path to recovery, you might consider filing for Chapter 7 bankruptcy. A Chapter 7 bankruptcy will erase most of your debts, giving you a blank slate you can use to build better financial habits.

However, a Chapter 7 bankruptcy does have some significant downsides. You’ll find it very hard to obtain new credit or qualify for a mortgage for up to 10 years. Buying a new home or a car will be much more challenging, and any loans you qualify for will likely have unfavorable terms, like high interest rates.

That’s why many people who file for Chapter 7 bankruptcy use reaffirmation agreements on assets they’d like to keep, such as their vehicle and home.

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How a reaffirmation agreement works

A reaffirmation agreement is a legal document between you and your creditor that reaffirms your financing terms during a bankruptcy. Rather than discharging the outstanding debt, you’ll continue to make payments according to the agreement. In exchange, you’ll retain the asset instead of giving it up during the bankruptcy.

If your loan with your creditor currently has unsatisfactory terms, you can use the reaffirmation process to negotiate new terms. For instance, you might request smaller monthly payments, a longer loan term, or a lower interest rate. The decision to accept your new terms is at your creditor’s discretion.

Once you have a reaffirmation agreement with a creditor, it becomes part of the bankruptcy process. A judge will review the reaffirmation agreement in a separate hearing. They’ll examine the terms of the deal, your current income status, and the history of missed payments.

If the judge decides you can reasonably follow the terms of the agreement without difficulty, they’ll approve the reaffirmation, and you’ll keep the asset.

Let’s consider an example.

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You have some time to change your mind after signing a reaffirmation agreement

Occasionally, people sign reaffirmation agreements and realize they won’t be able to stick with the repayment terms.

Giving up an asset you need (like your house) can be challenging, so you might be tempted to sign an agreement even though you can’t afford it. Thankfully, you have 60 days after filing a reaffirmation agreement with the court to change your mind. After 60 days, you’re stuck with the contract.

Before reaffirming a debt, it’s best to sit down with a qualified credit counselor or financial advisor who can help you decide whether keeping the asset is worthwhile. The advisor will examine your income and current expenses to determine whether you can reasonably keep up with the payments.

Remember, you’re under no obligation to sign a reaffirmation agreement. It’s usually best to hand over the asset and discharge the debt if you know you’ll have trouble repaying it.

A reaffirmation agreement allows you to keep your car or house during a bankruptcy

Reaffirmation agreements benefit you if you want to keep certain assets during bankruptcy, like a car or home. However, you’ll want to ensure your income is enough to keep up with the payments.

If you don’t repay a reaffirmed debt, the lender can seize the asset and sue you for the outstanding obligation. If it wins a judgment against you, it can garnish your wages or freeze your bank account.

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