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.

  1. Debtor in Possession (DIP)

    A debtor in possession (DIP) is a person or corporation that ...
  2. Collection-Proof

    Collection proof is a word used to describe a person that has ...
  3. Chapter 11

    Named after the U.S. bankruptcy code 11, Chapter 11 is a form ...
  4. Fair Debt Collection Practices ...

    The Fair Debt Collection Practices Act is a federal law that ...
  5. Debt Assignment

    Debt assignment is a transfer of debt, and all the associated ...
  6. Bankruptcy Trustee

    Bankruptcy trustee is a person appointed by the United States ...
Related Articles
  1. Personal Finance

    The Other Personal Bankruptcy Option: Chapter 13

    In a Chapter 13 bankruptcy, filers develop a plan to repay all or part of their "past due" debt. Any allowable debt left afterward is discharged.
  2. Taxes

    How To Survive A Bankruptcy Filing

    Learn how to make filing for bankruptcy less painful so you can successfully rebuild your financial life.
  3. Personal Finance

    Should You File for Bankruptcy?

    Find out how to determine whether bankruptcy will help or hurt your financial situation.
  4. Personal Finance

    What You Need To Know About Bankruptcy

    Don't choose this last-resort option until you learn how it will affect your future.
  5. Taxes

    How to Hire a Bankruptcy Lawyer

    How do you find the right bankruptcy lawyer? What you should look for to determine the right attorney for you.
  6. Investing

    Will Corporate Debt Drag Your Stock Down?

    Corporate debt can mean a leg up for firms, or the boot for investors. How to tell the difference.
  7. Taxes

    Bankruptcy Filing Changes That Could Affect You

    When the economy is down, more people file for bankruptcy. Make sure you know about the changes that have been made to this process.
  8. Insights

    Alternative Ways To Invest In Debt

    These five options can provide investors with lucrative investments - but they're not without risk.
  9. Financial Advisor

    Corporate bankruptcy: An overview

    When public company files for corporate bankruptcy, the bondholders are first in line to receive their share back. Equity holders on the other hand, are second in line to bondholders when a corporate ...
  1. Why are credit cards able to charge such high interest rates compared to other lenders?

    A true financial horror story began on Halloween in 1978. On that date, the Supreme Court began hearing Marquette National ... Read Answer >>
  2. How can a creditor improve its Average Collection Period?

    Read about some of the ways that a business can improve its accounts receivable management practices to shorten its average ... Read Answer >>
Trading Center