What is a reaffirmation?
When you reaffirm a debt you agree to be liable for that debt even though it would otherwise be discharged in your bankruptcy case. You can reaffirm the debt under the original contract terms, or in some cases you may be able to negotiate a different interest rate or principal amount.
Reaffirmation agreement terms
Many lenders take the position that they will only offer a reaffirmation agreement on the original contract terms. Some lenders will offer better terms on severely underwater or low value vehicles. A reaffirmation agreement is an agreement and, like all agreements, both parties must agree to be bound.
Which debts should you reaffirm?
The vast majority of reaffirmations concern vehicle loans in consumer cases. You can reaffirm other debts, but it is usually not advisable unless there are special circumstances. You should consult with a local attorney if you are considering reaffirming a debt other than a vehicle loan.
First alternative - surrender
There are three alternatives to reaffirmation. First, you can surrender the secured property to the lender and the debt will be discharged. This is usually preferable when you owe a large amount or your vehicle is worth much less than you owe. In that case you can usually go out and get another vehicle for less money or make other transportation arrangements that are a better fit for your finances.
Second alternative - redemption
The second option is redemption. If your vehicle is worth much less than you owe, you can redeem the vehicle by paying its current value and you will not be liable for the balance of the loan. The downside to this option is that you will usually have to pay the lender in a lump sum. There are companies that provide redemption loans for this purpose, but the interest rates tend to be very high and you may not end up saving much money.
Third alternative -- "ride through"
Also called "retain and pay," "ride through" may be an option with some lenders and in some areas based on local law. Under this option you keep making payments on the debt and keep the vehicle. If you fall behind the lender can still repossess, but they can not pursue you for any deficiency, which they would be able to do if there is a reaffirmation agreement in place. Regardless of whether you have the right to "ride through" under the law in your area, some lenders will agree to this type of arrangement because it is a better business decision for them to keep receiving payments on the full loan amount. However, this is a handshake agreement and the lender could change their policy in the future and repossess even if you are current on payments. Other downsides to this option are that some lenders will not report your on-time payments to the credit reporting agencies or allow you to have automatic payments or online access to your account.
Please note that although this legal guide may provide information concerning potential legal issues, it is not a substitute for legal advice from qualified counsel. You should consult an attorney for individual advice regarding your own situation. Providing this legal guide does not create any attorney-client relationship between you and Kelly Zinser, Shareholder at Olenicoff & Zinser, PC in Irvine, California. For more information on bankruptcy, please see our website.