A reaffirmation agreement is a contract between a debtor and creditor that waives the discharge of a debt in a pending Chapter 7 bankruptcy proceeding. The debt is one that would otherwise be discharged in the bankruptcy. With a reaffirmation agreement, however, it is agreed by both parties that the debt will remain active. The debtor is therefore still liable for the debt.
Benefits of a Reaffirmation Agreement
Entering into a reaffirmation agreement with a creditor has some benefits for the creditor and the debtor. For a creditor, the advantage is clear. The creditor retains the ability to repossess or foreclose on collateral if the debtor defaults.
For a debtor, there are benefits as well. These include:
- The creditor becomes obligated to report payments to the credit bureaus which can help establish credit recovery faster if the payments are made as agreed.
- Often times loan agreements are adjusted within the agreement enabling the debtor more ease in the repayment.
- The debtor is allowed to keep the collateral (such as a car). If a reaffirmation agreement is not signed during a bankruptcy, it is possible for a creditor to repossess even if the payments are current.
Disadvantages of a Reaffirmation Agreement
There are times that a reaffirmation agreement is not advised. Each individual circumstance is different. There is no one set rule that governs when the agreement is beneficial or not but, in most cases, it is considered a poor choice if:
- The collateral is not worth what is owed.
- The creditor is not likely to physically repossess the collateral (jewelry, furniture, computers, etc.).
- You are not positive you can make the payments. You will be liable for them and cannot file bankruptcy again for eight full years.
Important Facts about Reaffirmation Agreements
When filing a reaffirmation agreement, you will need to execute it properly. The agreement must be fully filled out. It must also be filed in a timely manner that coordinates with the filing of your bankruptcy.
Here are some other important facts concerning reaffirmation agreements:
- You will want to stay current with any creditors you may wish to enter into an agreement with.
- Failure to properly execute the agreement will nullify it all together.
Bankruptcy laws are put into place with the intention of protecting debtors. Reaffirmation agreements definitely help the creditor. Sometimes, they are beneficial to the debtor as well. If there is no benefit for the debtor, it is generally not advisable to enter into the agreement.
Determining if such a move is a good one for you is a tough, but very important, decision to make. Often, there are reasons, both pro and con, that are easy to overlook. Bankruptcy laws vary from state to state so it is important to know the laws of your state. It is always a wise idea to consult a professional.