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.

Key Takeaways

  • Reaffirmation is an agreement by a debtor, to a lender, to repay some or all of their debt.
  • Debtors make reaffirmation agreements purely on a voluntary basis.
  • When a borrower reaffirms a debt, this is noted by credit reporting agencies, which then register that the person will make regular on-time payments.
  • Reaffirmations often result in borrowers not having to cede their pledged collateral to debtors.
  • Chapter 7 bankruptcy is primarily when reaffirmation is used.

Understanding Reaffirmation

Debtors make reaffirmation agreements purely on a voluntary basis. They are legal documents, but a person cannot go to prison 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 collateral, if they so choose. 

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.

Reaffirmation is primarily utilized in Chapter 7 bankruptcy. Chapter 7 focuses on the liquidation of assets and the order in which the debt is to be repaid. Chapter 7 is primarily used for individuals having difficulty meeting their debt obligations.

Chapter 7 absolves the borrower of the debt that they have to pay, however, it does not remove the fact that the lender can claim the assets that are pledged as collateral. Your personal liability on the debt is gone but not the lender's right to take your assets. Reaffirmation protects against a lender taking your assets.

How Reaffirmation 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 register that the person is making 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.

Borrowers who simply need to absolve themselves of their debts and are not likely to make regular payments do not stand to gain anything from the reaffirmation process. Reaffirmation does make a borrower liable for a debt and is arranged through a formal agreement with the courts and is therefore a legal process for the borrower to protect themselves and their assets.

It is in the best interest of the borrower to go through a legal process, such as reaffirmation, whenever aiming to resolve or manage financial obligations.

Example of Reaffirmation

For example, John owns a home and has $200,000 left to pay on his mortgage. His monthly payments of principal and interest amount to $1,305. John recently lost his job during a recession and has now been out of work for one year, unable to find employment. He has depleted his savings and is unable to make his mortgage payments.

John arranges with his mortgage company a reaffirmation that is approved in court. He reaffirms the debt he owes on the home mortgage, with a chance to renegotiate payments with the lender. He and his mortgage company come to an agreement of a lower monthly mortgage payment or a lower interest rate during the reaffirmation process. John is able to meet these lower payments with some side jobs he has been able to find.

The reaffirmation has prevented John from having to have his home foreclosed. If, however, he fails to make the mortgage payments under the new terms, then the lender will take possession of his home and begin foreclosure proceedings.