One of the most frightening occurrences that most people have to deal with bankruptcy – especially those cases filed under Chapter 7 – is that they stand to lose their property. However, there is a possibility that a debtor can keep their secured property by entering into a reaffirmation agreement.
What is reaffirmation agreement?
In bankruptcy, a reaffirmation agreement is a contract agreed upon between the debtor and the creditor to waive a discharge debt so the debtor has to pay the debt in order to secure it. In short, this simply means that a debtor reaffirms his debt so that it would not be repossessed by the lender. This is usually done with a secured loan or property, like a car for an instance. When a debtor files for bankruptcy and he does not repay the loan, the lender can easily take the property and have the debtor lose it.
Under Chapter 7 cases, debtors who wish to keep their secured properties sign a reaffirmation agreement on the condition that the debtor keeps up the payments. However, there is a ruling that debts can only be reaffirmed if they are considered as exempt. Otherwise, the bankruptcy trustee will likely sell those properties and use the proceeds to pay of the unsecured creditors.
Advantages and Disadvantages of Reaffirmation Agreement
Perhaps one of the most obvious and most important advantages of a reaffirmation agreement is that it is the surest way for a debtor to keep their properties as long as they abide by the agreements set on the contract of reaffirmation and also the payments they owe to creditors or lenders. It is also another good method for debtors to negotiate new terms for their debts which might allow them to reduce payments, pay with lower interest rates, or reduce the total amount that has to be paid over the debt.
On the other hand, a reaffirmation agreement poses a disadvantage because it makes the debtor once again liable for the debt. Since the dischargeability for debts that are reaffirmed are waived, then the debtor will be bound legally to pay any deficient balance on the said property even if it becomes damaged or destroyed. Also, defaulting on the agreed payments will automatically make the creditor to either repossess or auction off the property and bill the remaining balanced owed to the debtor.
When should debtors use reaffirmation agreement?
Since a reaffirmation poses more disadvantage, a debtor should only use it when a creditor insists on making the agreement, the property is something that you really need to keep like a house, or a debtor has a good chance of making payments on time with the remaining balance.
Restrictions on Reaffirmation
Debtors should also be aware that the best way to reaffirm debts in bankruptcy is to keep current on debt payments to stay on the good side of the creditors. This also allows debtors to have the power to negotiate the agreement when the right time comes.
Also, a bankruptcy attorney would be best to have to represent the debtor in the reaffirmation agreement to ensure that the debtor knows all the consequences of the said agreement. Otherwise, a debtor who has no attorney or has one but refused to sign the reaffirmation agreement will make the court hold a hearing.