Reaffirmation in Bankruptcy: Keep Your Car or Home

So, you’re going through bankruptcy and wondering what the heck “reaffirmation” means. I get it. It’s a confusing term that sounds like something out of a sci-fi movie. But trust me, it’s not as complicated as it seems.

Reaffirmation in bankruptcy basically means agreeing to keep paying off a debt, even after your other debts are wiped out. It’s a way to hang onto important stuff like your car or house, as long as you can afford the payments.

But is reaffirming a debt always a smart move? Not necessarily. Let’s break it down and figure out if it makes sense for your unique situation.

What Is a Reaffirmation Agreement in Bankruptcy?

When you’re going through a bankruptcy case, you might come across something called a “reaffirmation agreement.” But what exactly is that? In simple terms, a reaffirmation agreement is a new promise to repay a debt that would otherwise be wiped out in a Chapter 7 bankruptcy. When you sign one of these agreements, you’re essentially taking back personal responsibility for a particular debt that would have been discharged in your bankruptcy case.

Definition of a Reaffirmation Agreement

Here’s the deal: reaffirmation agreements are typically used for secured debts, like mortgages or car loans. In these cases, the creditor has a lien on the property. By signing a reaffirmation agreement, you agree to continue paying the debt so you can keep the property.

Reaffirmation: In the context of a bankruptcy, to “reaffirm” a debt means to voluntarily agree to remain liable for the debt even after the bankruptcy case concludes. This is often done for secured debts where the debtor wants to keep the collateral (e.g., a house or a car). By reaffirming the debt, the debtor continues to make payments on the debt and, in return, keeps the collateral.

Types of Debts Commonly Reaffirmed

So, what kinds of debts do people usually reaffirm? According to Bankrate, “A reaffirmation agreement eliminates a specific debt from your bankruptcy discharge and obliges you to make payments based on the terms and conditions of the agreement. It is usually applicable to secured debts which are backed by collateral (home or vehicle).”

Consequences of Reaffirming a Debt

Now, reaffirming a debt can have its perks. It provides a guaranteed way to keep collateral as long as you follow the terms of the reaffirmation agreement. As long as you stay current on your payments, the lender will let you keep the property. A reaffirmation agreement also stops you from losing property through repossession or foreclosure. But here’s the catch: When you reaffirm a debt, you’re agreeing to remain liable for it even after your bankruptcy case is over. If you default on the payments later, the creditor can come after you to collect. So, it’s a big decision that shouldn’t be taken lightly.

Advantages and Disadvantages of Reaffirming a Debt

Like most things in life, reaffirming a debt has its pros and cons. Let’s break it down.

Reasons to Consider Reaffirming a Debt

Reaffirmation can be a smart way to keep property that is worth more than what you owe on it. Here are some reasons to reaffirm a debt:

• You need to keep the collateral
• You are not qualified to redeem the property
• Your creditor insists on it
• You have the means to pay off the balance

On the flip side, reaffirming a debt comes with some serious risks. For instance, it doesn’t give you a clean financial slate. You can’t walk away from the reaffirmed debt. If you sign an agreement and file for bankruptcy, you’ll have to pay what you owe. Additionally, you’ll have to wait for another 8 years before you can file Chapter 7 again to wipe out the debt. Bottom line: Reaffirming a debt requires a strong financial commitment.

Impact on Credit Score and Future Borrowing

So, how does reaffirming a debt affect your credit score and future borrowing ability? Well, it’s a bit of a mixed bag. On one hand, as noted by Bankrate, “Reaffirming a debt can jump-start your credit after bankruptcy and let you retain ownership of important assets like a house or car.” But on the other hand, they also caution that “If you’re looking for a clean slate, there is no legal obligation to reaffirm your debt. Only you can decide what is suitable for your financial situation.”

The Reaffirmation Process in Bankruptcy

Alright, so you’ve weighed the pros and cons and decided to reaffirm a debt. What happens next? Let’s walk through the process. You start by filing a reaffirmation agreement within 60 days from the first date of the meeting of creditors. When you submit the agreement, it will need to be accepted by the creditor. After, you’ll have to wait for bankruptcy judges to evaluate, review, and approve the agreement. Note that the court will not approve the agreement until you’re eligible for immediate discharge.

Role of the Bankruptcy Court and Judge

The bankruptcy court and judge play a crucial role in the reaffirmation process. Most reaffirmation agreements must be reviewed by a bankruptcy judge to make sure they are in the debtor’s best interest. When the lender receives your agreement, they will file it with the bankruptcy court. A hearing will be scheduled to discuss the reaffirmation and decide whether or not to approve the agreement.

Required Documentation and Signatures

To reaffirm a debt, you’ll need to fill out and sign some paperwork. The United States Bankruptcy Court provides the necessary Reaffirmation Documents on their website.

Factors to Consider Before Reaffirming a Debt

Before you commit to reaffirming a debt, there are a few important factors to consider. First and foremost, you need to take a hard look at your financial situation and make sure you can actually afford the payments. Reaffirmation is not for everyone. Bankruptcy code requires the debtor’s attorney to file a statement with the court affirming that their client can repay the debt. Also, to reaffirm a debt, a person must be current on their loan payments. 

Comparing Reaffirmation to Other Options

Before you jump into a reaffirmation agreement, it’s worth exploring your other options. For example, Chapter 7 bankruptcy is one of the most common debt relief options. It’s quick, simple, and the most common type of bankruptcy. It is also known as “liquidation bankruptcy” because it discharges most of your unsecured debts including credit cards, medical bills, and income tax debt. If you’re far behind on your bills and can’t afford your monthly payments, filing Chapter 7 bankruptcy could be the best option. 

Seeking Guidance from a Bankruptcy Attorney

Reaffirming a debt is a big decision with long-lasting consequences. That’s why it’s so important to seek guidance from an experienced bankruptcy attorney before signing anything. The United States Bankruptcy Court even includes a section in their Reaffirmation Documents that must be filled out by an attorney if the debtor is represented by one.

Alternatives to Reaffirmation Agreements

If reaffirming a debt doesn’t seem like the right move for you, there are a few other options to consider. One alternative is to simply surrender the collateral (like a car or house) that secures the debt. The United States Bankruptcy Court’s Reaffirmation Documents include a section where you can indicate your intent to surrender the property.

Redeeming the Property

Another option is to redeem the property by paying the creditor the current value of the collateral in one lump sum. Again, the Reaffirmation Documents provided by the United States Bankruptcy Court have a section for this.

Negotiating with the Creditor

Finally, you may be able to work out a deal with the creditor outside of the formal reaffirmation process. The Reaffirmation Documents touch on this possibility as well. At the end of the day, whether or not to reaffirm a debt in bankruptcy is a highly personal decision that depends on your unique financial situation and goals. But armed with the right information and guidance, you can make the choice that’s best for you and your fresh start.

Conclusion

Reaffirmation in bankruptcy can be a lifeline if you want to keep your car or home. But it’s not a decision to make lightly. You’re essentially saying “I know I’m broke, but I promise to keep paying this debt no matter what.”

Before you sign on the dotted line, make sure you can truly afford the payments long-term. If you fall behind, you could lose the property AND still owe the debt. Ouch.

The bottom line? Weigh your options carefully and talk to a bankruptcy pro before reaffirming any debts. Choose wisely with some smart guidance, and you’re on your way to a sunnier money outlook—no need to compromise on what counts.

If you are struggling to pay your bills, contact The Law Office of William Waldner. We can review your finances and determine the best course of action.