WHAT IS Reaffirmation

Reaffirmation is a type of agreement a debtor makes with a lender to repay some or all of a debt despite going through bankruptcy proceedings. When a person files for bankruptcy, they do so in order to be relieved of a debt burden they cannot pay. 

By entering into a reaffirmation agreement, a borrower often maintains possession of an asset held as collateral such as a home or a car, as long as they can fully repay the debt owed on that particular loan.

BREAKING DOWN Reaffirmation

Debtors make reaffirmation agreements purely voluntary basis. They are legal documents, but a person cannot go to jail for violating them. In the event that the debtor fails to make their scheduled payments and breaches the agreement, the lender takes possession of the asset, if they so choose. For example, if a borrower reaffirms the debt they owe on their home mortgage but fails to make a mortgage payments, the lender takes possession of the home and begins foreclosure proceedings.

Reaffirmation is not always possible for people filing for bankruptcy. Bankruptcy code stipulates that the debtor's attorney must file a statement with the court affirming that their client can repay the debt without incurring further personal financial harm. Generally, to reaffirm a debt, a person must be current on their payments of that particular loan.

How Reaffirming Helps Borrowers

Some borrowers want to continue making their loan payments without going through the formal reaffirmation process. However, reaffirmation has some benefits for the borrower. When a borrower reaffirms a debt, this is noted by credit reporting agencies, which then registers that the person makes regular on-time payments. This typically helps a person trying to rebuild their credit after bankruptcy. Borrowers who do not reaffirm a debt, however, typically won't see their payments register with credit reporting agencies.

Reaffirming also gives a borrower a chance to renegotiate payments with a lender. Some borrowers negotiate a lower monthly mortgage payment or a lower interest rate during the reaffirmation process, fo example.

Borrowers who simply need to absolve themselves of their debts and are not likely tomake regular payments do not stand to gain anything from the reaffirmation process. Reaffirmation does make a borrower liable for a debt, unlike bankruptcy, which lets borrowers absolve, or walk away from their debts.