Debt reaffirmation may be a way to help you retain certain assets, even when filing Chapter 7 bankruptcy.
Filing bankruptcy typically means that you will be freed from any obligation to pay debts. While this can be a great relief from the burden of stressful financial difficulties, it also means that you will have to give up a lot of your assets.
If you wish to keep some of your property secured by a debt, you can look into the possibility of debt reaffirmation. However, it is recommended that you seek the advice of an attorney who can tell you whether or not this is the best option for your situation.
What is Debt Reaffirmation?
In a Chapter 7 bankruptcy, most of your debts are cleared, and any secured property is usually repossessed to help creditors regain some – or all – of what you owe. Reaffirming a debt means that you wish to keep a certain asset by continuing to make the payments on the loan. In such cases, a new contract is signed between you and the creditor and, essentially, you are agreeing to take on an old debt that would normally be included in the bankruptcy.
In other words, you will still have the debt, even after your bankruptcy discharge.
What Debts Can Be Reaffirmed?
Only secured debts are eligible for debt reaffirmation. Reaffirmation agreements have also been done for mortgages in certain states so you can keep your home. Most contracts involve car loans although other assets such as recreational vehicles, boats, or equipment and tools may also be considered.
In many cases, reaffirmation will not be permitted unless you – the debtor – can prove that keeping the asset is a necessity. For example, your car may be your only means of transportation to get to work each day. Likewise, if you work at a trade, certain tools and equipment may be needed for you to do your job. Since these assets are directly connected to your source of income, there is a higher chance that your reaffirmation request will be approved by the court.
Does It Require Court Approval?
Many creditors are willing to consider debt reaffirmation because it is in their best interest to do so. Mortgage companies can foreclose on your home and likely be able to recover the amount of the loan by re-selling the property. However, many car lenders would rather you continue making payments because they often have to settle for auction or wholesale prices on repossessed vehicles.
Creditors will often encourage, or even suggest, that you reaffirm a loan; but, even if an agreement is reached between you and the lender, it still has to be approved by the bankruptcy court. To receive approval, you must be able to prove that you can afford to continue making the payments in question. The court will make a decision based on your financial situation.
Once the agreement is approved, it is considered to be a legally binding contract and the creditor has the right to take collection action if you fail to make payments.
How Do Financial Experts Feel About It?
Most financial experts discourage reaffirming any debt because they believe that it rarely works in the debtors favor.
Often, people will reaffirm too much and soon find themselves in the same financial problems that the bankruptcy was supposed to fix.
Bankruptcy will hurt your credit rating no matter how much debt is cleared, so there is really no point in reaffirming so much debt that you are not able to gain the fresh start that bankruptcy can provide.
However, there are some instances when debt reaffirmation may be a good idea as long as you can afford the payments.
What Are The Benefits?
Debt affirmation is a major commitment and should be taken under serious consideration.
Even if you get to keep your assets, in some cases it is not in your best interest to sign an agreement. Before speaking with creditors or seeking the blessing of the courts, make sure that you will benefit from a reaffirmation agreement or you could end up regretting your decision.
Advantages include:
- You will get to keep a particular asset.
- You may be able to renegotiate for better terms. Since a reaffirmation agreement is considered a new contract between you and a creditor, you may be able to negotiate for lower interest rates, reduced balances, or the elimination of late fees and service charges. If you can work out an agreement that will lower your payments and allow you comfortably afford the monthly expense, then you will have an easier time gaining approval from the bankruptcy court.
- You will be able to repair your credit report more quickly. If you are able to reaffirm a debt and maintain regular payments, your credit report will show at least one loan that is current and in good standing. Since payment history is the best way to rebuild your credit score, reaffirmation may actually help you recover faster following a bankruptcy.
The decision to reaffirm a debt can be difficult – creditors encourage it while financial experts discourage it.
In most cases, it does not make sense because you may be defeating the very purpose of bankruptcy. However, there are times when debt reaffirmation may be of benefit, so you should speak with a lawyer who can look at your finances and help you decide which decision is best for you.
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