What is a Reaffirmation Agreement?

October 10, 2018

By Fears Nachawati Bankruptcy Attorney, Julianne Parker on October 10, 2018

A reaffirmation agreement is a contract entered into by a Chapter 7 Debtor whereby the Debtor agrees to be bound by the original terms of the secured debt, as if he/she had never filed for bankruptcy protection. This means that if a car or home is reaffirmed in a Chapter 7 bankruptcy case and the Debtor later defaults on the car or mortgage payments, the creditor can not only repossess the car/foreclose on the house but can also sue the Debtor for the deficiency balance (the difference between what is owed on the house/car and the amount received after sale of the house/car once foreclosed/repossessed.  If no Reaffirmation Agreement is entered into, the creditor cannot sue for the deficiency balance, but can still repossess/foreclose on the collateral in the event of a default, since a bankruptcy does not invalidate their security interest, regardless of whether or not the debt is reaffirmed.

Mortgage companies often do not desire/demand a Reaffirmation Agreement, though car creditors frequently demand them.  It appears that mortgage companies often see no need for a Reaffirmation Agreement, since they can still look to foreclose on the house in the event of a default. I will send letters requesting Reaffirmation Agreements to all secured creditors shortly after a Chapter 7 bankruptcy case is filed.  In more than 90% of my Chapter 7 cases, car creditor forward Reaffirmation Agreements to me and I have the Debtor come in to meet with me to determine whether or not he/she wishes to reaffirm the debt.  In 90% or more of my Chapter 7 cases, mortgage companies do NOT forward Reaffirmation Agreements to me.

The Judges in the Northern District of Texas have ruled that Debtors cannot force a mortgage company to reaffirm the debt, so we are unable to file a Reaffirmation Agreement without the mortgage company’s consent and signature.

Problems can sometimes arise when the Chapter 7 Debtor later wishes to refinance his mortgage, do a loan modification, or have his mortgage payments properly reflected on his credit bureau report.  Mortgage companies sometimes allege that they cannot refinance or modify the mortgage loan because no Reaffirmation Agreement was filed and approved.  This ignores the fact that the debt was not reaffirmed due to the mortgage company’s failure to act, not due to any failure to act on the part of the Debtor or his/her attorney.  Sometimes mortgage companies will say that it is the debtor’s fault (or his/her attorneys fault) that a reaffirmation agreement was not filed but this ignores the fact that the mortgage company is the one who refused or failed to act in connection with the reaffirmation agreement.

Mortgage companies sometimes will tell Debtors that he/she should talk to her lawyer about reopening his/her bankruptcy case for the purpose of entering into a Reaffirmation Agreement.  The Judges in the Northern District of Texas has ruled that this is NOT permitted.  I suspect that Judges in other parts of the country might allow this action under certain circumstances (because it is a common suggestion from mortgage companies), but the Judges in our district have ruled that they do not have jurisdiction to consider such matters, so it will NOT be successful here.

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