Definition

• Under a reaffirmation agreement, a debtor voluntarily agrees to repay a loan that could otherwise be canceled through bankruptcy. By signing a reaffirmation agreement, he continues to be legally responsible for debt repayment and may have financial consequences if he can no longer afford the payments. If a debtor defaults on a reaffirmed loan, a creditor has a right to repossess the loan collateral and sue the debtor for a deficiency balance.
  
  

Canceling a Reaffirmation Agreement

• A debtor should consult with a bankruptcy attorney about whether he should sign a reaffirmation agreement. He must be sure that can repay the debt before he signs it. If a debtor signs an agreement but later decides he can no longer afford to repay the debt, he can cancel it before the court issues a bankruptcy discharge or within 60 days of agreement filing date. To cancel a reaffirmation agreement, a debtor must send a notice to the creditor that he wishes to rescind the decision to reaffirm. He should also mail a copy to the court for the bankruptcy file.
  
  

Possible Consequences

• Although a reaffirmation agreement is not mandatory, a creditor may require a debtor to sign it as a condition to keeping the loan collateral. If a debtor doesn't sign an agreement or cancels it, a creditor may repossess the collateral. In this case, however, a debtor will not be responsible for any deficiency balance on the loan. In many cases, a debtor continues to make payments on a loan without reaffirming it and a creditor doesn't repossess unless he defaults.
  
  

When To Cancel An Agreement

• A debtor should cancel a reaffirmation agreement if he finds that he can no longer afford the payments due to becoming unemployed or getting a pay cut. If the collateral's value is much less than the loan balance, a debtor should consider surrendering it to the bank. If a payment and the interest rate is too high, he should cancel the reaffirmation agreement as he may have difficulties repaying the loan later when he no longer has the bankruptcy protection. The debtor must file a cancellation notice within the allowed time period.