Loan Reaffirmation Agreement

• In a Chapter 7 bankruptcy, the debtor’s personal property and possessions may be sold with the assets going towards his debts. The sale of an asset may not yield its true worth, and other factors, including the debtor’s desire to keep the property, may give rise to the issue of a reaffirmation agreement. This type of agreement reaffirms the debt but allows the debtor to keep the property. The debtor, in return, must pay back the debt, and it will not be discharged during the bankruptcy.
  
  

Potential Effects

• At first blush, a reaffirmation agreement seems lucrative: the debtor’s obligation to the creditor remains, and the debtor does not forfeit his property. During the negotiation process, the debtor and creditor could change the terms of the agreement. This may mean that the interest rate could change, as well as the amount of the payments. The exact effects depend on the terms of the agreement.
  
  

Undue Hardship

• One particular concern with a reaffirmation agreement is whether it presents an undue hardship on the debtor. Increasing the terms of the original loan -- such as increasing the interest rate or monthly payments -- could impose an undue hardship, in some instances. The bankruptcy court must review the terms of the agreement and analyze the terms against the debtor’s financial situation. In some cases, the bankruptcy court could set aside the agreement, subjecting the property at issue to liquidation (depending on the type of bankruptcy).
  
  

Other Issues

• Reaffirmation agreements are legal documents that may contain complicated terms and clauses. A debtor may want to hold on to property, such as a car, but it may not be in his best interest, even with a reaffirmation agreement that has terms more favorable than the original loan. To protect your rights during bankruptcy, you should seek legal representation and, at a minimum, review the terms of a reaffirmation agreement with an attorney before signing it or submitting it to court.