The Trouble With Reaffirmation Agreements

Reaffirmation Agreements in Bankruptcy

Filing bankruptcy is suppose to pave the way for a fresh financial start; but when a debtor signs a reaffirmation agreement in bankruptcy it keeps old debts alive well after the bankruptcy discharge.  Many debtors who want to keep their home after they exit bankruptcy feel pressured to sign a reaffirmation agreement.  Mortgage companies want debtors to sign a reaffirmation agreement because they know that once it is signed it obligates the debtor to pay the debt even though they received a bankruptcy discharge.  Threatened with the prospect of not having their post-bankruptcy mortgage payments reported to the credit bureau, many debtors scramble to sign reaffirmation agreements even when they are not in their best interests.

Below are a few reasons why you may not want to sign a reaffirmation agreement:

  1. When a debtor signs a reaffirmation agreement, the debt will be treated as if they debtor never filed bankruptcy.  If the debtor fails to make a payment on a reaffirmed mortgage debt, the lender can foreclose and sue the debtor for any deficiency after the foreclosure auction. But if the debtor does not sign the mortgage reaffirmation, they have no obligation to pay the mortgage debt, even if there is a deficiency after a foreclosure auction.
  2. We are living in uncertain economic times.  You really don’t know what will happen with your job after your bankruptcy is discharged.  If you sign a reaffirmation agreement and suddenly face unemployment after bankruptcy, you’re going to once again face foreclosure and a possible lawsuit for a deficiency as described above.
  3. The bankruptcy trustee may not allow you to reaffirm your debt anyway if it will cause a financial burden for you to pay it after bankruptcy. If signing a reaffirmation agreement will cause a financial problem after bankruptcy, just say no.