Legal, Regulatory, and Privacy Issues

What is debt reaffirmation?


Reaffirming a loan can be necessary, but too many consumers say debt collectors tricked them into doing it accidentally.

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Two things generally stop a creditor from being able to force collection of a debt: bankruptcy and time.

But sometimes, due to guilt or the coaxing of a debt collector, consumers are tempted to revive an uncollectable debt and agree to pay it. In the debt industry, it’s called “reaffirmation.”

Reaffirming old, dusty debt is usually not a wise move, say financial experts.

“As a general rule for consumers, the presumption should be that it’s never a good idea to reaffirm debt, particularly in bankruptcy,” says Jack Williams, resident scholar for the American Bankruptcy Institute.

Creditors encourage reaffirmation

Before and during a bankruptcy, creditors will encourage you to reaffirm your debts. What that means: This particular obligation won’t be included in bankruptcy’s debt-cleansing process. You’ll go into the bankruptcy with the debt and, when you finish, you’ll still have the debt.

“It never makes sense to reaffirm a debt for anything except, conceivably, a car,” says Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys. In 30 years of practice, “I have never advised a client to reaffirm a debt,” he says.

“Contrary to popular belief, people who go into bankruptcy don’t want to be there,” says Williams. Out of a feeling of obligation, “often they will attempt to reaffirm too much, and the remedy process that bankruptcy provides is gutted.”

In bankruptcy, court’s OK needed to reaffirm

For that reason, if you want to reaffirm a debt in bankruptcy, you have to get the move blessed by the court. Ask yourself: Will you really be able to afford it? And do you have access to a less expensive option?

“If it was a bad deal before the bankruptcy, it may be a bad deal now,” says John Ventura, author of “The Credit Repair Handbook” and director of the Texas Consumer Complaint Center at the University of Houston Law School.

With an auto loan, the court is more likely to approve the request because you need transportation, Ventura says. But try to reaffirm a frivolous purchase, he adds, “and you might have a problem.”

There is one benefit to reaffirming a debt: If you reaffirm one debt and maintain a good payment history on it, you’ll at least have one current loan showing in your credit report. That can build back your good credit that much faster after bankruptcy.

The car question

If your sole concern is keeping your wheels, reaffirmation isn’t always necessary, says Sommer.

Some car companies, especially some of the foreign automakers, won’t require reaffirmation, he says.  As long as you keep making payments, you keep the car. A bankruptcy attorney can advise you as to which companies require reaffirmation.

“Japanese carmakers have figured out it’s better to keep people making the payments than to get the car back,” says Sommer.

After bankruptcy, if a collector contacts you about one of your discharged debts, call your bankruptcy attorney, says John Rao, attorney with the National Consumer Law Center. The tactic is not legal and could signal a scam or illegal collection attempt, he cautions.

Reaffirmation by any other name …

Outside of bankruptcy, reaffirming a debt goes by many different names: reviving, re-establishing and, sometimes, re-aging. What it means: Even though the debt is so old that it’s passed the statutes of limitations so the creditor can’t sue to force payment, you have decided to acknowledge the debt, restart the statute of limitations on collection, and give the creditor every opportunity to use the legal system to obtain the money through judgments, liens and garnishments.

Sound like a smart financial idea? Probably not, according to several experts.

“If you make a payment, any payment, you re-establish not only the debt, but the statute of limitations,” says Ventura. “And they can sue you.”

Purchasing debt for pennies and trying to collect is “a multibillion dollar industry, and a new phenomenon within the last several years,” says Richard J. Rubin, attorney and former chair of the National Association of Consumer Advocates.

For debt buyers, “it’s a very profitable lottery ticket,” he says. “And they don’t have to collect a lot to make a lot of money.”

What you need to know: The statutes of limitations for forced collection varies from state to state. For credit cards, the period is usually between three to six years. While the rules may differ slightly in each state, the clock will usually start when the consumer goes into default, usually about 30 days after the last payment, says Rubin.

A bad debt can also stay on your credit report for seven years. Because most creditors wait six months to charge off a debt, that winds up being seven years and six months after the first delinquency. The clock starts when the original account goes to collections (internal or a third-party) or is charged off (whichever is earlier), according to the Fair Credit Reporting Act.Even if the debt is sold and resold to third-party collectors, it still has to come off your credit report when the original debt reaches its expiration date.

Only in writing

In some states, acknowledging the debt in writing (or even by phone), will reset the statute of limitations on forced collection, says Rubin. This has led to a practice among third-party collectors called “duping,” where the debt collector tricks the consumer into reviving a debt after the statute of limitations has expired, he says.

One method Rubin has seen: The consumer receives a letter informing him of a debt and neglecting to mention that the statute of limitations has already run out. At the end of the letter are multiple choice boxes: a) I owe the money, and here’s the check; b) I owe the money, and here’s a partial payment, or c) I owe the money, but I can’t afford to pay right now. Check any box and you’ve just given the collector the means to sue you, he says.

Consumers could also get a phone call, with a very friendly debt collector who’s very willing to help work out payment. “They will be real solicitous of getting you to pay anything,” says Ventura.

So if you’re considering settling an old debt, don’t admit to anything and get everything in writing before you pay the first dollar.

In collections, “verbal promises are often broken and difficult to prove after the fact,” says David A. Szwak, attorney and owner of Bodenheimer, Jones & Szwak  LLC.

What you want in writing: an assurance that the person you are dealing with has the authority to negotiate and that the amount you agree to will satisfy the debt in full. Also be clear on the language they will use to report the item to the credit bureaus. Have your agreement specify the original creditor, as well as the account number and delinquency date, so there’s no question later over which debt you’ve paid.

But, too often, the consumer who is smart enough to demand a written agreement is forced to walk away from the debt. “Most collectors won’t sign a release no matter what the circumstances,” Szwak says.

If you’re serious about repaying an old debt, contact an attorney. (One good source: the National Association of Consumer Advocates.)

You may find out that the move could actually worsen your financial situation or put critical assets, like a home, at risk. You could also discover that the clock for collection has expired or that the item will soon come off of your credit report.

“Collectors sometimes try to take advantage of the notion that the debt still exists,” says Rao, who adds that, in many cases, the consumer would be better off using their dispute rights to deal with the issue.

First, he says, “I would talk with an attorney to see if there’s another way.”

See related: 9 questions to ask before reaffirming debt

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