How do Reaffirmation Agreements work in Bankruptcy?

Reaffirmation Agreement: Understanding Its Purpose and Implications

A reaffirmation agreement is a legally binding contract between a debtor and a creditor that allows the debtor to continue paying off a specific debt that might otherwise be discharged in bankruptcy. This agreement typically applies to secured debts, such as mortgages or car loans, where the debtor wishes to retain the collateral associated with the debt. By reaffirming the debt, the debtor agrees to remain liable for the debt even after the bankruptcy case is closed.

The Purpose of Reaffirmation Agreements

The primary purpose of a reaffirmation agreement is to allow a debtor to retain ownership of specific property by continuing to make payments on the associated debt. In situations where surrendering the collateral would create significant hardship for the debtor, such as losing a primary residence or necessary transportation, a reaffirmation agreement provides a means to maintain possession of the property while still discharging other debts through bankruptcy.

Key Considerations for Debtors

Debtors considering a reaffirmation agreement should fully understand the potential benefits and risks involved. While reaffirming a debt may allow them to keep important property, it also means they will remain personally liable for the debt. It is crucial for debtors to carefully consider their ability to manage the reaffirmed debt after the bankruptcy process. Moreover, they should ensure that the reaffirmation is in their best long-term financial interest. One consideration is whether there is negative equity (i.e. the collateral is worth less than what is owed), and whether you can afford the payments after you receive a discharge. Even if either (or both) of these considerations are negative, you may still be able to keep the collateral in lieu of a reaffirmation. Contact Spalding Law Firm to get more information about your specific situation.

Implications for Creditors

From a creditor’s standpoint, a reaffirmation agreement ensures that the debtor continues to make payments on the debt as initially agreed upon, even after the bankruptcy discharge. This can provide creditors with a level of certainty in receiving repayment for the debt owed to them. However, creditors must adhere to specific legal requirements and ensure that the reaffirmation agreement complies with bankruptcy laws and provides adequate protection for the debtor.

Legal Considerations and Assistance

Navigating reaffirmation agreements can be complex, and it is important for both debtors and creditors to seek legal counsel to understand their rights and obligations fully. A qualified attorney can provide valuable guidance on the implications of reaffirmation, help negotiate the terms of the agreement, and ensure compliance with all legal requirements. Additionally, legal representation can assist in evaluating whether reaffirmation is the most advantageous option given the debtor’s financial circumstances and the creditor’s interests.