Why do reaffirmation agreements exist? 

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Written by Andrea Wimmer, Esq.  
Updated December 18, 2019

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Why do reaffirmation agreements exist?

Before the 2005 amendments to the Bankruptcy Code, it was possible to do a so-called ride-through for consumer debt secured by personal property. As long as the filer was current on their car payments, and kept dutifully making all payments even after filing Chapter 7, they'd get to keep the car. The bank was happy because they were getting their payments and the filer was happy because they got to keep the car. 

Unfortunately, life happens and not everyone who did a ride through was able to keep up with car payments even though they got a fresh start in the form of a bankruptcy discharge.That's when the banks ran into some problems. They'd repossess the car - as they normally would - and sell it to the highest bidder. All par for the course. But, that's where the bankruptcy changed things for the bank: Since the filer's personal obligation to pay the loan was discharged in their Chapter 7 bankruptcy, the bank was prohibited from asking their customer to pay the deficiency balance still owing on the loan. That would violate the discharge injunction and could get the bank in trouble with the bankruptcy court.

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What do reaffirmation agreements accomplish?

In 2005, Congress enacted a wide-spread overhaul of the Bankruptcy Code that eliminated the ride-through for personal property (but not for debts secured by real property, like a mortgage). Now, in order for a filer to be able to keep their car, they have to agree that they will continue to be personally liable on the loan. They have to reaffirm their personal liability on the total debt still owing. And with that, the reaffirmation agreement was created. If a debt is reaffirmed, then the lender can not only repossess the car if you default on payments, they can also sue you for the balance left on the loan. Because the secured debt wasn't discharged. Because you reaffirmed it.

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