There are two assets that the majority of Debtors filing bankruptcy under Chapter 7 want to keep if they can: their car and their home. While they want to wipe out (discharge) their unsecured debts, they are willing to keep paying their car loans and home mortgages. And the lenders on both are also eager for the Debtors to keep paying them and keep the collateral, so long as the Debtors are current on those loans. Lenders may prepare contracts to re-commit the Debtor to the terms of the original loan agreement and send them to the Debtor’s attorney for signature by both the Debtor and the attorney, and eventual filing with the Bankruptcy Court. The Court will approve them, so long as continuing to pay is not an “undue hardship” on the Debtor, meaning that there is enough income left over to make those payments after other monthly living expenses are paid. These contracts are known as “reaffirmation agreements” or, for short, “reaffs”.
The important thing for a Debtor to understand is that entering into a reaff removes this Lender from the protection of the bankruptcy discharge. If the Debtor cannot continue to make the payments on the car or house, the Lender can not only take back its collateral, but the reaff gives the Lender the right to go after the Debtor personally for any portion of the balance owed that the sale of the collateral doesn’t cover. Therefore, entering into a reaffirmation agreement actually benefits the Lender more than the Debtor.
