What is a reaffirmation agreement?
A reaffirmation agreement is a document that represents an agreement between a bankrupt borrower and one of their creditors. The agreement allows the borrower to keep an asset, such as a house or vehicle, in exchange for repaying some or all of the original loan amount.
If you’re considering bankruptcy, or already in the process of doing so, here’s what you need to know about debt reaffirmation and how it affects you.
What is reaffirmation?
The goal of bankruptcy is paying off some or all of your debts so that you no longer have to make payments. But in some cases, you may want to reaffirm a certain debt, agreeing to pay back all or part of what you owe instead of asking for it to be canceled.
For example, if you have a car loan, including it in your bankruptcy will cause you to lose the vehicle. If you need the car for regular transportation, reaffirming that debt will allow you to keep it.
Reaffirmation is generally used in Chapter 7 bankruptcy cases, where the borrower tries to pay off his debts in full instead of agreeing to a restructured repayment plan.
What is a reaffirmation agreement?
A reaffirmation agreement is a voluntary document that legally requires a borrower to pay some or all of what they owe into a specific account instead of paying off the debt in bankruptcy.
The agreement contains several pieces of information, including the amount of debt you are reaffirming, your repayment terms, the annual percentage rate, details about the collateral (if applicable) and more.
If you want to file a reaffirmation agreement, you must do so within 60 days of the first date of the creditors meeting. Once you submit it, it must be accepted by the creditor. Once this happens, the court will not approve the deal until you qualify for immediate release.
After you file the agreement with the court, you have 60 days from the filing date or the release date, whichever is later, to change your mind and cancel it.
What are reaffirmation agreements for
A reaffirmation agreement removes a specific debt from your bankruptcy discharge and legally requires you to make payments according to the terms of the agreement.
If the debt you have is secured, which means it uses your home or vehicle as collateral and you want to keep possession of that collateral, a reaffirmation agreement prevents you from losing it through repossession or foreclosure. It can also help reduce the damage that bankruptcy could have on your credit score.
However, reaffirming debt can be a significant financial commitment and impact the effectiveness of your bankruptcy. And because there are limits how many times you can file for bankruptcy, reaffirming a debt that you know you won’t be able to meet can end up hurting you further in the long run.
What happens if you don’t sign a reaffirmation agreement?
Reaffirmation agreements are voluntary, so you don’t have to sign one. You don’t even have to have one if you want to voluntarily pay off a debt instead of including it in your bankruptcy.
It’s also important to note that reaffirmation agreements can only be filed by the debtor, so you don’t have to worry about a creditor coming to you with an agreement. However, if you choose to pay off a debt instead of reaffirming it or paying it off without a reaffirmation agreement, you risk losing the asset that secures your debt and your credit score will take a bigger impact.
If you file one and it is accepted by the court, you will be legally obligated to make payments according to the terms of the agreement.
Can you file a reaffirmation agreement after release?
Once a discharge order has been entered in your bankruptcy file, you can no longer reaffirm any of the debts that were included in the discharge agreement. The same applies if your case has been closed by the court.
Therefore, it is important to consider a reaffirmation well in advance of the release date. Take the time to review your situation and consider hiring a bankruptcy lawyer if you haven’t already done so to help you with the decision-making process.
The bottom line
If you are bankrupt, a reaffirmation agreement allows you to agree to pay some or all of certain debts you have. This process will remove that balance from your discharge, but it can help lessen the damage caused by bankruptcy to your credit score and also allow you to keep the loan collateral.
Before signing a reaffirmation agreement, it is a good idea to consult with a bankruptcy lawyer. An experienced lawyer can help you determine if this is the right solution for you and, if so, make sure that you are doing everything correctly and in your best interests.