First of all, a reaffirmation agreement between a bankruptcy creditor and a bankruptcy debtor is entered into after the petition is filed and is purely voluntary. Essentially, the debtor agrees to pay the creditor on a debt that, in the absence of such an agreement, would otherwise be discharged in the bankruptcy.
Will A Bankruptcy Reaffirmation Agreements Work For Me?
You may be wondering why a debtor would file for federal bankruptcy relief and then agree to pay on a debt anyway. After all, isn’t the debtor there to get out from under the debts that he or she can’t afford to pay? The answer to that question is in the type of debt that is the subject of a reaffirmation.
Only for Secured Debts. Reaffirmation agreements are only used to reaffirm secured debts, including car loans, home mortgages, and recreational vehicle loans. The obligation is reaffirmed, but that doesn’t mean that the amount to be paid isn’t renegotiated. With representation from a knowledgeable bankruptcy attorney, the prudent debtor will seek a much better deal from the creditor or simply refuse to reaffirm the debt. The amount of the debt, the interest rate, the monthly payment amount, and any collateral are all renegotiable.
Three Possible Outcomes. If the debtor has a vehicle on an installment loan and files for bankruptcy, then three things can happen with that debt:
- The debtor is discharged from the installment debt and surrenders the vehicle to the creditor.
- The debtor keeps the vehicle and reaffirms the debt with the creditor under more realistic terms.
- The debtor who is not in default keeps the vehicle and continues under the terms of the original installment agreement (the debtor’s personal liability is discharged).
Is Bankruptcy Reaffirmation a Good Idea?
To reaffirm or not to reaffirm. On the one hand, if the debtor needs the car to get back and forth to work and the vehicle is in reasonably good operating order, then reaffirming the debt may be a good solution. On the other hand, if the vehicle needs repairs to be operational or has little resale value, then the debtor is probably better off allowing the creditor to repossess the vehicle. The debtor is certainly free to acquire a replacement vehicle post-bankruptcy.
Even after a bankruptcy has been filed, the secured creditor cannot repossess the collateral unless and until the debtor has defaulted on the underlying loan and the creditor has a lien on the property. Assume the bankruptcy attorney in Phoenix advises the debtor to refrain from entering into a reaffirmation agreement with the creditor. If the debtor remains current with the payments, has the vehicle properly insured as required, and hasn’t otherwise breached the original agreement, then there is no default that would give the creditor a right to repossess.
Is A Court Agreement Required?
A reaffirmation agreement must be entered into before the court’s discharge order is entered. After signing the agreement, the debtor may still change his or her mind and rescind, or cancel, the agreement.
Rescission of Reaffirmation. Rescission can occur anytime prior to the discharge order or within 60-days after the agreement is filed with the court, whichever is last to occur. If approved by the court, and not rescinded by the debtor, then the reaffirmation becomes binding on both parties and continues to be enforceable after the bankruptcy case is closed. Because these agreements have long-term consequences, you need Lawrence ‘D’ Pew, a well-respected bankruptcy attorney in Phoenix, to represent you.
Court Approval Required. Before any reaffirmation agreement can stand, the court must first approve it. You need to understand, as your bankruptcy attorney in Phoenix will attest, not every proposed reaffirmation will be approved. The court will not approve a reaffirmation agreement that clearly creates an undue financial hardship for the debtor because it will likely end in default.
Why Understanding These Agreements Is So Important
Our attorneys ensure that their clients fully understand the benefits and detriments involved with reaffirmation agreements. Once the debt is reaffirmed, it survives the bankruptcy. If the debtor defaults on the terms of the reaffirmation agreement, filing a new bankruptcy is generally not an option for many years — another eight years under a Chapter 7 liquidation.
Key Concepts to Remember. Here are some key concepts to remember when the issue of reaffirmation agreements is raised in your bankruptcy case:
- By signing the reaffirmation agreement, you give up bankruptcy protection from that debt.
- If you default on the agreement later, then the creditor may take action to collect on the debt, including repossession and garnishment of wages and accounts.
- The debtor has the right to rescind the agreement at any time prior to the court’s discharge order or within the 60-day period after filing the agreement, whichever occurs last. The debtor must notify the creditor of the decision to rescind the agreement.
- Reaffirmation agreements are purely voluntary between the parties, they are not a requirement. Therefore, the creditor and the debtor must both come to an agreement on the terms, and the court must then approve those terms before they become binding.
- If you are not in default, you can continue making payments on the debt through the bankruptcy and thereafter, without signing a reaffirmation agreement.
If you are contemplating a reaffirmation agreement, let us help you to review it before you sign. If you’ve already signed a reaffirmation agreement, then speaking with an attorney to ensure you are not being taken advantage of is a good idea.
Need Help With Bankruptcy Reaffirmation? We’re Here For You
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