What is a Reaffirmation Agreement?

Our Bankruptcy Attorney Explains What You Need to Know Before Entering a Reaffirmation Agreement

In Chapter 7 bankruptcy, you have several options when it comes to dealing with secured debts. You can reaffirm the debt, redeem the collateral, surrender the collateral and discharge the debt, or, in certain circumstances, retain the collateral and continue making payments without reaffirming the debt.

So, what is a reaffirmation agreement? It is a contract between a debtor and a creditor in which the debtor agrees to pay a debt without the protection provided by bankruptcy. This agreement does not affect any other debts. However, the debtor is required to pay this particular creditor as though he or she never declared bankruptcy. There are many reasons why reaffirmation agreements in Chapter 7 bankruptcy are appealing. But, it is important to weigh the pros and cons of this arrangement.

You should never decide to enter a reaffirmation agreement alone. Always discuss the options with a qualified bankruptcy lawyer. Don’t let creditors pressure you into signing these agreements. Kevin D. Judd is a Washington DC bankruptcy lawyer with a wealth of experience helping individuals manage bankruptcy. He can help you decide when to enter into and when to avoid reaffirmation agreements.

Should I Keep or Surrender Secured Property?

Making decisions about whether to keep or surrender secured property involves weighing a number of factors. You will need to consider the following:

  • Your present financial situation
  • Anticipated changes in income or expenses
  • The likelihood of future default
  • Whether the collateral is a necessity

While most Chapter 7 debtors want to keep their homes and vehicles, they may be willing to part with other secured property if it means a sounder financial future. By surrendering unneeded and unwanted property, Chapter 7 debtors can emerge from bankruptcy better able to afford their mortgage and car payments. Sometimes, however, keeping your home and/or vehicle just is not practical. In those situations, you can surrender your house or car through bankruptcy to get out from under burdensome loan payments. A knowledgeable Washington DC and Maryland bankruptcy attorney can assist you in making important decisions about your secured property.

When Should You Sign a Reaffirmation Agreement?

When a Chapter 7 debtor wants to keep secured property but cannot afford to redeem it, i.e., to pay the fair market value in one lump sum, a reaffirmation agreement may be a good choice. A reaffirmation agreement is a voluntary contract that allows you to keep secured collateral so long as you continue making regularly scheduled payments for it. If you can afford to make payments for the collateral you wish to retain, a reaffirmation agreement might be in your best interests. 

Signing a reaffirmation agreement in Chapter 7 bankruptcy is a complicated decision. Thus, you should always discuss the option with a qualified bankruptcy attorney before signing the contract. 

When considering a reaffirmation agreement, ask yourself the following questions:

  • Can you afford the asset you wish to keep?
  • Would you be financially better off keeping the item instead of purchasing a new one? (For example, it may be better to keep a reliable car that you have nearly finished paying off, and it may be better to allow a trustee to sell an unreliable or underused car.)

If you answer “yes” to either of these questions, only then should you consider entering a reaffirmation agreement. The next step is to discuss the possibility of a reaffirmation agreement with a licensed bankruptcy attorney to get help making informed legal decisions.

Reaffirmation Agreements Are Binding Contracts

It is important to understand that reaffirmation agreements are binding contracts. Reaffirmed debts are not subject to the Chapter 7 discharge — you will still be legally liable for the debt after bankruptcy. That means if you fall behind on payments after your bankruptcy case is complete, the collateral can be repossessed and the creditor can come after you for the deficiency balance, i.e., the remaining balance after the collateral has been sold. If there is a good chance you will not be able to afford a loan payment after bankruptcy, it may not be wise to sign a reaffirmation agreement. In fact, depending on your particular circumstances, surrendering the property and discharging the debt may be your best option.

To learn more about reaffirmation agreements and other aspects of filing Chapter 7 bankruptcy, contact a dedicated Washington DC and Maryland bankruptcy lawyer today.

For sound counsel, reach out to a seasoned reaffirmation agreement attorney in Washington, D.C. and Maryland. Contact us online or dial (202) 888-8454.

Pros and Cons of Reaffirmation Agreements

If you file for bankruptcy, you may seek reaffirmation agreements when you desire to keep specific secured debts. This is particularly useful, as this agreement allows you to continue using a vehicle. In addition, paying the debt updates your credit report.

However, the bankruptcy does not apply to that debt. Therefore, you must continue to pay for the asset without any assistance from the bankruptcy claim. Additionally, you cannot bankrupt or discharge this particular debt for six years following the reaffirmation agreement. The creditor may even take action to collect debt if you fail to make payments.

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