3 Pros and 2 Cons for Reaffirming Loans in Bankruptcy Court

There’s a new scene up in the Bankruptcy Court in Pittsburgh recently. Judge Carlota Bohm is the judge assigned to the vast majority of Chapter 7 cases. She took the bench as a new judge about a year ago. Before she took the bench, judges rarely scheduled hearings when you wanted to sign a reaffirmation agreement. Now, we’ve got hearings, albeit brief ones, and a lot of folks aren’t sure why.

First, a reminder about just what a reaffirmation agreement is. Whenever you have a secured debt for a car or mortgage loan, you must choose on your Statement of Intentions what you want to do with the loan. In other words, are you going to surrender that car, or are you going to keep it. And if you’re going to keep it, are you going to reaffirm the loan in Court or are you going to “retain and pay”?

Specifically, a “reaffirmation” of a debt is when you formally waive the discharge as to that debt. In other words, you state to the Court that you will be on the hook for that debt, no matter what happens in the future.

Most people react sharply, and tell me that of course, they want to keep their cars, and of course they need their car to get to work, etc., and that they absolutely want to reaffirm it. I respond that it’s more complicated than that.

The 2 Cons

1) Deficiency Judgments. Lenders and banks absolutely want you to reaffirm your loans when you file bankruptcy. Why? Because if you default on your car loan 6 months or a year after your case is over, then they can repossess your car, and then sue you for the balance on the loan. Remember that cars depreciate quite a bit, and the car on which you owe $20,000 will be sold at a dealers-only auction for $6,000 or $7,000. Then the bank will sue you for the remaining $13,000 or $14,000. Ouch. But you don’t reaffirm, then they can’t sue you for this balance. If you do reaffirm, then yes,you’re on the hook!

2) Gap Insurance. Let’s say that you reaffirm your loan, and someone hits your car. Let’s say that your car is totalled. Your car insurer will pay the fair market value of your car. Your insurer isn’t going to necessarily pay off your car loan (unless you have gap insurance). If you don’t have gap insurance, you might wind up with a totalled car, AND a balance owed on your loan. Ouch again.

The 3 Pros

1) Credit Rebuilding. If you decide to reaffirm, then IF you make your future payments on time, then those payments will help to rebuild your credit rating. Note that this could be a hindrance if you wind up paying the same loan late! But if you do not reaffirm the loan at all, then your payments will not show up on your credit report at all; it will appear instead that the loan has been wiped out (discharged).

2) Invoices and Statements. If you do not reaffirm your loan, then your lender will not send out monthly loan statements. Yes, if you retain the car or house, then you still owe the money and need to make a payment, but you’ll need to photocopy an old statement to make sure you know the account number and payment address.

3) Website access. This is similar to number 2. If you do not reaffirm your loan, then you won’t be able to make payments electronically on your lender’s website. Yes, you can still make a payment via your bank’s website, or you can mail in a payment. This isn’t a huge deal, but it can be annoying. Clearly, the banks are trying their utmost to get folks to reaffirm their loans.

Retain and Pay

My take on reaffirmation agreements is that I don’t encourage clients to reaffirm on car loans, but I don’t worry as much about mortgage loans being reaffirmed. Why? Please remember that I write this as a Pennsylvania bankruptcy attorney, and folks in other States have different laws and practices. But because cars depreciate like crazy, I don’t ever want a client to default on a car loan and wind up facing a big deficiency judgment. Car lenders are particularly aggressive when they need to repossess a car and then collect on a deficiency. If you reaffirm, and then later default, I guarantee that they will seek a deficiency!

In Pennsylvania, mortgage companies rarely seek deficiencies on residential mortgage loans after a sheriff’s sale. This is a common practice in other States, but for now in Pennsylvania, we virtually never see banks do this on residential mortgages. Be careful though–this could change. There’s no Pennsylvania law that says that they can’t.

So, for cars, are you allowed to “retain and pay”? An Allegheny County Judge ruled in a 2007 case that you indeed could. The case involved a person who had filed a bankruptcy, and who did not reaffirm his car loan. The car was repossessed soon after the bankruptcy case was over. The loan was completely current, and the only reason for the repossession was because of the failure to reaffirm. The Judge ruled that the repossession was not legal, because the loan account was still current.

Lastly, if you choose not to reaffirm on your car loan, then you can simply surrender your car after the bankruptcy case is over, and then enter into a new car loan with a different lender. Yes, you will be able to rebuild your credit, and fairly soon after the Chapter 7 is over, you may very well qualify for a new and better loan.

Judge Bohm and the Court’s Position on Reaffirming Loans

If you decide to reaffirm a mortgage or car loan, the Judge wants to know that you understand what you are choosing to do. The Judge does however deny a high percentage of reaffirmation requests. Why? Because she states that you don’t have to reaffirm a loan in order to keep the house or car in question.

One big difference however is if your bank offers you a lower interest rate or lower payment through the reaffirmation agreement. The Court will be much more likely to approve a reaffirmation agreement when the new loan terms are better.

And it never hurts to ask your mortgage company or bank to do just that. Some of them will never do it, but your lawyer should ask anyway.

If you have any comments, please let me know!

18 Comments on “3 Pros and 2 Cons for Reaffirming Loans in Bankruptcy Court”

  1. Alan,  
    I agree. Then there’s the situation where some mortgage creditors such as Chase simply will not prepare a reaffirmation agreement. Thanks, 
    Shawn Wright

    1. I had a ch 7 discharged in 2022 which included my auto loan. I still have the car with no reaffirmation. However, I am not continuing payments now as the vehicle is not worth the amount to pay off the lein. I know I won’t owe any debt, but will it be reported as a repossession on my credit report?


      1. Melissa, No I do not believe it should be reported as a repossession on your credit report.

  2. Brett, 
    Our Judge agrees with the fact that reaffirmations aren’t required, so she will deny a fairly high percentage of the reaffirmation requests. It is nice however when we get a reaffirmation agreement that provides for a reduced payment or interest rate. 
    Remember too that in Pennsylvania, we never see deficiency judgments and in Pittsburgh, we never had a big appreciation in home prices, so we don’t generally see big deficiencies anyway. Thanks, 
    Shawn Wright

  3. I am not located in PA, but have a general reaffirmation question. I reaffirmed my second mortgage as I wanted to keep my house. My first lender would not reaffirm my mortgage. I could not continue payments and my home is foreclosing. The second mortgage was a burden to me, as I thought I could make payments, but could not. Can my Chapter 7 be reopened to include, again, my reaffirmed second mortgage? Are there special circumstances where this would be an option?

  4. Thank you, I wish my attorney had advised me so. We did not discuss and, ofcourse, he signed off. My second mortgage holder has a chargeoff on my credit report. As they were a part of my foreclosure proceedings, the motion for collection from the firm that this debt was turned over to, their collection motion was dismissed so as not to have two suits. However, they wanted to keep the collection suit instead of the forclosire and filed a motion to withdraw from the foreclosure to pursue the collection suit. Both the collection motion and the foreclosure involvement motion were dismissed, possibly the firm was not aware of what happened earlier with the collection motion dismissal(without prejudice),and they did not stop the foreclosure involvement withdrawal. I know the chargeoff is a terrible impact on my credit. Can I remove the chargeoff? Thanks so much.

  5. My husband and I filed BK 7 and discharged in Jan. Even though it wiped out some tax debt we still have a big tax debt left from previous 5 years. Our lawyer prepared and bank signed off on a Reaffirmation for our car but did not recommend for us to do one with Mortgage. We want to do a cash out refinance but so far Chase and Wells Fargo refused us without Reaffirmation agreement? We are still paying our mortgage monthly as well. Are there lenders that will give us a new loan so we can pursue a Cash Out Refininace? My credit score has gone up based on Experian but not Mortgage. Please advise.

  6. I filed ch 7 I’m keeping my car but I was 3 months behind on my payments before my bankruptcy and I signed a reaffirmation letter. Bankruptcy discharged. I logged into my account it stated deficiency adjustment. I logged in the next day it was closed. What does this mean?

  7. I filed for Chapter 13 in Indiana in 2018. At that time, I told my attorney I wanted to reaffirm both my car loan and my mortgage, but I was informed I was required to put everything through the Chapter 13. When Covid hit and I lost my job, I had my Chapter 13 converted to a Chapter 7. My car loan was reaffirmed, but my attorney never gave me any option to reaffirm my mortgage. I was unaware what even happened until I realized last year that my credit report still shows my mortgage closed due to bankruptcy in 2018 and no payments reported, although I have made all payments in full and on time since my Chapter 7 began in 2020 and my Trustee stopped making payments. The mortgage company is telling me that the only thing I can do is refinance, although none of the things you’ve mentioned above are occurring other than my credit report being affected: I can access the site easily and I make mobile payments. I also received a paper statement each month until I signed up for paperless billing a couple of months ago. I pulled all my bankruptcy documents filed with the court and the Intention filed stated I was going to reaffirm both car and mortgage, but no additional documents on my mortgage were ever filed.

    I’ve tried reaching out to my attorney, who has refused to help other than sending me a link to his credit rebuilding site. I’ve tried filing a complaint with the Bar Association on the grounds that he did not act in my best interests by presenting me with my options regarding my mortgage and reaffirmation, nor the consequences of either choice or asking what my preferred course of action would be. Since he did not present me with the option, I was under the impression that it had to be included in the Chapter 7, as was indicated to me at the time of filing the Chapter 13. The Bar Association did not see any misconduct or misrepresentation.

    Do I have any options in getting this resolved in any way? Is there any option since the Intent indicated a Reaffirmation Agreement would be filed and it wasn’t, nor did the court follow up on the mortgage based on the information provided in the Intent.

    1. You can only reaffirm a car or mortgage loan in a Chapter 7 case. Chapter 13 cases do not have a reaffirmation process. But it’s possible that your mortgage company did not send a reaffirmation agreement to your bankruptcy attorney. In fact, most mortgage companies do not send them in Chapter 7 cases. Car lenders generally do send them, but in my experience, I don’t seem to think that mortgage lenders do that on a regular basis. You certainly don’t need to reaffirm your mortgage, because as you said, you are making your payments regularly and you have full access to their website for payment purposes. If you are able to rebuild your credit rating, then you should be fine. I tell all of my Chapter 7 clients that they should have 700 credit scores within 18-24 months of the completion of their bankruptcy cases.

      Getting back to your case, I cannot say that your attorney did something wrong, because the mortgage company is the one who has to prepare the reaffirmation agreement, and I’ve seen some mortgage companies, when asked, reply that they don’t do them. And finally, you can’t sign one now after the case is over. The Judge in your case will not reopen the bankruptcy case in order for you to submit a reaffirmation agreement. Finally, you should realize that they don’t really help the Debtors. They are agreements that help the lender, because if you later default on the loan, then they have full recourse against you. So, let’s say that you had signed the reaffirmation agreement, and you later default on the loan, then the mortgage company could foreclose against you for non-payment and then get a personal judgment against you for collections if the sale of the property was insufficient to cover the loan balance. That certainly isn’t in your best interest. Just my thoughts.

  8. Hello, Our house was included in our chapter 7 bankruptcy years ago which didn’t get reaffirmed like we wanted … anyway we continue to pay and it’s current. Question is we have fallen in hard times again since husbands job loss and I was wondering if creditors could come after our house? Being it’s current and has a lot of equity but again it was not reaffirmed in previous bankruptcy so they can’t get anything… correct? They can’t take it or make us sell? 2nd question… what happens to the house if we file chapter 7 again? Thoughts? Thanks in advance

    1. Chris, The fact that you did not reaffirm does not mean that you are more vulnerable to mortgage foreclosure. No, they can’t force you to sell just because you didn’t reaffirm. As for your second question, I’m not sure if Chapter 7 would be your best bet. You should consult with a local bankruptcy attorney. If you are currently having financial problems due to your Husband’s job loss, you should focus on keeping up to date on your mortgage loan. If you do wind up falling behind on it, then you should look into filing a Chapter 13 case which will permit you to repay the mortgage loan arrears over a 5 year period. As a general rule, right now, you should focus on staying up to date on your mortgage and car loans, if possible. But definitely consult with a local bankruptcy attorney in your area to get the best advice. Best wishes.

  9. Hello Shawn,

    If I didn’t reaffirm my loan but want to now, years later, how can I do that? I actually signed the paperwork to reaffirm and my bank said they got it two days late, so they didn’t reaffirm my loan. This was all years ago and I’d like to actually reaffirm my loan. What do you think about this?

    1. Hi Renee, no the Court will not permit you to reopen the bankruptcy case to reaffirm your loan. I presume this is your mortgage, but it’s the same if it’s a car loan. Basically reaffirmation agreements help the banks, not you the borrower. To keep your property (whether it is your house or your vehicle), you do not need to reaffirm the loan in question.

      As I see it, there are two inconveniences that you will face since you didn’t reaffirm. First, your loan will not be reported on your credit report. This isn’t a huge deal because you can rebuild your credit score again by simply getting a new credit card after the bankruptcy is over, and then using it regularly, and paying it off regularly. That’s a simple fix, and it’s worked for many of my clients.

      Second, you won’t be able to pay online at the mortgage company’s website. That is also not a big deal because you can still pay on the loan, and they should be mailing you monthly billing statements with which to send in your payments. If you are not receiving billing statements, then call the mortgage company and specially request that.

      Lastly, if you ever want to sell your house, yes, you can still do it if you didn’t reaffirm. Yes, the mortgage company will send you the payoff letter. And you can also refinance your loan if you ever find the need to do so. In any event, those are my thoughts. Thanks!

  10. Hello, my auto finance company included themselves in my Chapter 7. The loan was brand new and discharged(showing 100% paid on my credit report). Fast forward 7-8 months my car was totaled. I did not reaffirm. Should my insurance company pay them for value of the car?

    1. Yes the insurance company will pay off the loan. If you had gap insurance, then you will receive funds too likely. Thanks.

  11. In the state of Florida can a mortgage be reaffirmed under chapter 7 if the bankruptcy stopped foreclosure.

    1. Tammy, you have brought up two somewhat different concepts. The automatic stay of the bankruptcy filing has stopped a mortgage foreclosure. But there are obviously still a significant amount of mortgage loan arrears to be repaid.
      As a result, the mortgage company will want to resume its foreclosure case unless the homeowner can bring the mortgage loan current. I don’t usually believe that a Chapter 7 bankruptcy filing will do anything with a foreclosure other than to delay it for 3-4 months or so.

      The second concept is that of mortgage loan reaffirmation. To get a creditor to reaffirm a secured loan usually requires that the loan is current. Remember that reaffirmation is a two-way street; the creditor has to also agree to the reaffirmation. So “can a mortgage be reaffirmed?” Yes, it could, but the mortgage company needs to agree to it, and I don’t think that they will agree to reaffirm a loan that is in arrears. Good luck with your situation.

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