by Paige Wright
If you are considering filing for bankruptcy, you may have heard the phrase “reaffirmation agreement.” A reaffirmation agreement is an agreement you may sign if you file a Chapter 7 bankruptcy that says you are going to keep a debt and continue paying it even though you have filed for bankruptcy relief. This is common for individuals that have houses or vehicles with loans against them when their case is filed.
The major benefit to signing a reaffirmation agreement is that the debt will positively report to credit reporting agencies if you are timely making payments. If you do not sign a reaffirmation agreement, the debt will not report to credit reporting agencies. However, the disadvantage to signing a reaffirmation agreement is that you are liable for paying the loan until it is paid in full. This means if you default on a reaffirmed debt after your case is filed and the collateral is repossessed or foreclosed upon, you may still be liable for a “deficiency balance.” A deficiency balance is the amount that is still left on the loan after the creditor takes and sells the collateral and applies the proceeds to the loan balance. If you do not sign the reaffirmation agreement, you cannot be liable for a deficiency balance.
Because of your continued liability on reaffirmed debts, it is important to carefully consider whether you want to sign a reaffirmation agreement. If you are underwater on a loan or have a very high interest rate, it may not be worth it to risk the possibility of a future deficiency balance. A Springfield, Missouri bankruptcy attorney can review the advantages and disadvantages of reaffirmation agreements with you in person.