What’s a Reaffirmation Agreement in Chapter 7 Bankruptcy?

By Cara O'Neill, Attorney
A reaffirmation agreement is a contract you sign if you want to remain liable for a debt.

Filing for Chapter 7 bankruptcy works by breaking the contract that you entered into with your creditor, and as a result, relieves you of the burden of paying the debt. Although it’s great to reduce the amount you owe, you might have an obligation that you’d like to keep. A reaffirmation agreement—a contract you sign agreeing to remain responsible for a debt—allows you to do so.

So why would you want to keep an old debt instead of wiping it out in bankruptcy? Most people sign a reaffirmation agreement so that they can keep property that they’re still paying on, such as a vehicle needed to get back and forth to work. Entering into a reaffirmation agreement will allow you to reinstate the vehicle loan, and, as long as you continue making payments, keep the car.

(Learn more about retaining a vehicle in Secured Claims in Chapter 7 Bankruptcy: Can I Keep My House or Car?)

Here’s the downside: If you stop paying after you sign a reaffirmation agreement, and the car gets repossessed, the bank can sell it at auction. If it sells for less than what’s owed, you’ll be on the hook for the difference, called a “deficiency balance,” just as if you’d never filed for bankruptcy.

(You can read more about the reaffirmation process in Why Must My Attorney or the Bankruptcy Court Approve My Reaffirmation Agreement?)

By contrast, if you’re current on your car payment when you file for bankruptcy, the lender might allow you to continue making the payment—and keep the vehicle—even without signing an agreement. The problem is that without a contract, the lender has the right to take the car at any time. The benefit, however, is that without a contract, the lender can’t hold you accountable for a deficiency balance.

(Find out how to reduce your payment when signing a reaffirmation agreement by reading How do I renegotiate my car loan in Chapter 7 bankruptcy?)

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