A Brief Introduction About the Reaffirmation Agreement
What is a reaffirmation agreement? Around the world, a lot of people borrow and lend money, creating debts. The person who borrows the money is known as the debtor or borrower, and the person who lends it is known as the creditor or lender. In some cases, the debtor can go bankrupt. In these cases, a creditor requires some kind of reassurance. A reaffirmation is that reassurance. The agreement is a promise that the debtor will pay some or all of the debt owed by him to the lender even though he/she has gone bankrupt.
During bankruptcy proceedings, some of the debts get discharged. Upon entering into a reaffirmation, it ensures that a certain debt is not discharged, and the liability still stands. How do we define reaffirmation? It is the reassertion or confirmation, and in this case, it is a confirmation that a debt will be paid.
Who Takes the Reaffirmation Agreement?
The parties to the agreement are a lender and a debtor who owes the lender. The debtor is someone who has borrowed money from the lender and is undergoing bankruptcy proceedings and is not willing to discharge the debt but instead pay it in part or full. The agreement is purely voluntary, and it is not mandated by the law to enter into one.
To ensure that the agreement is valid and binding, it should be taken before debt discharge is obtained in court during bankruptcy proceedings.
Purpose of the Reaffirmation Agreement
A debtor may wish to pay the debt he owes and not get it discharged, for example, a debtor may have taken a loan against a vehicle and would want to keep the vehicle despite bankruptcy proceedings, or he may have taken a mortgage against his house. In such cases, an agreement of reaffirmation or reaffirmation of mortgage helps the lender to get what he owes and the debtor to keep possession of the property that was given as collateral on a debt.
When a debtor reaffirms the debt, the credit reporting agencies take note of this reaffirmation, and scheduled payments continue. The reaffirmation agreement helps the debtor or borrower to rebuild their credit score despite filing for bankruptcy.
Sometimes, a debtor enters into a reaffirmation agreement to reopen negotiation about the debt or interest rates and can get lower rates than what was originally agreed upon. The agreement makes a debtor liable for the debt and does not absolve him/her from it as it would happen during bankruptcy proceedings.
Contents of the Reaffirmation Agreement
A reaffirmation agreement form contains multiple parts generally and is an exhaustive document.
- Part A consists of definitions, a summary of the agreement and debtor’s disclosures including the amount of debt that is to be reaffirmed, payment to be made, percentage of interest, frequency of payment, details about the collateral, etc.
- Part B consists of the signatures of the debtor and the lender or their representatives.
- Part C has certification by the lawyer of the debtor if the debtor has hired one and is not a pro se debtor.
- Part D has the debtor’s statement stating that he/she can make the payments as stated in the reaffirmation without any undue hardship.
- Part E typically consists of the debtor’s motion to seek court approval on the agreement. This agreement has to be filed before the court before the debts are discharged.
How to Draft the Reaffirmation Agreement?
If a debtor is drafting an agreement of reaffirmation without hiring an attorney, it is advisable to download an online reaffirmation agreement form and fill it to avoid missing out on any important parts in the agreement. The following points must be included while drafting the agreement:
- The five parts, i.e., parts A-E, must be a part of the agreement, and none of the parts should be missed. Part C, where the certification by the debtor’s lawyer is required, is to be included only if the debtor has a lawyer. An incomplete Part E can result in the agreement being declared as defective an unenforceable.
- The agreement should be clear, and no vague terms should be used. If complex legal terms are used, they should be defined for better understanding.
- None of the details that are to be filled like the annual percentage rate, amount to be reaffirmed, etc. must be missed.
- Make sure that both parties, the debtor and the lender, agree to all the clauses of the agreement.
- Make sure that both parties are identified correctly, and their personal details are mentioned.
- Mention what happens in case of a violation and how the lender can take possession of the collateral.
- Write down the procedures for alternative dispute resolution at the end of the reaffirmation agreement.
- The agreement may need to be notarized before being filed in court.
A good negotiation strategy for a reaffirmation agreement would get the debtor and the creditor on the same page. The debtor may want to renegotiate the debt and the rates of interest, but the creditor may not want to do so due to the fear of being paid less than what was originally agreed. Negotiation can open a middle ground where the debtor realizes his/her need to retain the collateral and the property for which the loan was taken, and the creditor realizes that if the debt were discharged, he/she would not recover the amount at all.
Benefits & Drawbacks of the Reaffirmation Agreement
Like every legal document, there are many benefits as well as drawbacks of the agreement.
- It is a voluntary agreement, not mandated by law.
- It allows the debtor to keep possession of the property for which the loan was taken.
- It allows the debtor to keep the security that was offered as collateral.
- It allows the lender to recover money.
- It offers the chance of renegotiation to the debtor about the rates of interest and the amount of debt.
- It allows the debtor to rebuild the credit score by making timely payments to the creditor and maintain a good payment history.
- A bankrupt debtor may not be able to pay the debt despite the agreement.
- It creates an ongoing financial liability on the part of the debtor.
- The agreement must be filed before a debt is discharged by the court, making it time-sensitive.
- The lender is not obligated to sign the reaffirmation offer and may refuse.
- The lender might end up getting less money as payback than what was expected.
- If the debtor reaffirms debts on things that are not extremely essential, the financial problems will not end for him/her.
- It is not easy to draft.
- The agreement may take additional time and money, which the debtor may not be able to afford.
- A reaffirmed debt cannot be discharged.
What Happens in Case of a Violation?
As the agreement is voluntary and is not required by law, the defaulter does not go to jail. If the debtor violates the agreement by not paying back the debt, the lender can possess the collateral that was given at the time of borrowing the money. If the collateral or the security does not cover the total amount of debt, then the lender can file a suit in court against the debtor to recover the remaining amount.
If the lender violates the agreement by breaching any of the terms that were signed or used coercion, fraud, or misrepresentation to create the agreement, the debtor can sue the lender in court and obtain relief.
What Happens If You Don’t Reaffirm Your Car Loan?
If the car loan is not reaffirmed, and if the lender repossessed the car, the debtor would not be personally liable for future payments. The debt will be discharged during bankruptcy proceedings.
A reaffirmation agreement ensures that the debtor gets the money he lent to the borrower or the debtor and also allows the debtor to retain the property that was the reason why the loan was taken. Many debts can get discharged during bankruptcy proceedings, and the agreement of reaffirmation adds an exception to a debt. This voluntary agreement is helpful for the lender as even when the debtor goes bankrupt(1), the lender can recover the debts.