Does a Loan Reaffirmation Agreement Change the Interest Rate?

You and your significant other have made the difficult decision to discharge your debts through the Chapter 7 bankruptcy process. You have filled out your creditor matrix, and the bankruptcy court has informed your creditors that you filed a bankruptcy petition. Now, at least one of your creditors has contacted you about reaffirming the debt you owe. If you choose to reaffirm the debt, your interest rate will not necessarily change.

Chapter 7 Discharge

When you file for Chapter 7 bankruptcy, the bankruptcy court discharges many of your debts. That means you will no longer have a legal obligation to pay those debts. Sometimes when you have a secured debt, the creditor wants to assure that he will receive full payment for that debt. Because the creditor knows that the bankruptcy court will discharge your debts, he will either try to repossess the collateral before the bankruptcy court issues the discharge or he will attempt to get you to reaffirm the debt.

Reaffirming Debt

You reaffirm the debt by signing a new contract, called a reaffirmation agreement, with the creditor. The reaffirmation agreement should detail the terms of the new contract. It will tell you the number of payments you have to make to pay off the debt. It will give you the frequency with which you must make the payments. It will give you the amount of the payments you must make. It will also tell you the interest rate of the debt. Generally, the terms of the reaffirmation agreement will mirror the terms of the original contract.

Interest Rate

Signing a reaffirmation agreement does not automatically cause your interest rate to fall, nor must your creditor lower your interest rate just because you decided to reaffirm your debt. However, your creditor may choose to allow you to lower your interest rate. Whether your creditor lowers your interest rate or not, neither you nor the creditor has the final say over whether you can reaffirm the debt. If you have representation, your lawyer must sign off on the reaffirmed debt. If you have filed for bankruptcy pro se, the bankruptcy judge must approve the reaffirmation.

Undue Hardship

Either your attorney or the bankruptcy judge must assure that you will not suffer undue hardship by agreeing to reaffirm the debt. If you pay your monthly expenses and do not have enough disposable income left over to cover the debt you are trying to reaffirm, you will suffer undue hardship. The bankruptcy court will require you to appear at a reaffirmation hearing if you file pro se or if your reaffirmation agreement shows a presumption of undue hardship.

the nest