What Exactly is a Reaffirmation Agreement?
A reaffirmation agreement is an agreement between a debtor in a bankruptcy case and a creditor through which the debtor agrees to continue to remain liable for the underlying debt and the creditor agrees to honor the terms of the agreement. Typically these kinds of agreements only in exist the case of secured obligations (think car payments and mortgages).
When Does it Make Sense for a Debtor to Reaffirm a Debt?
The decision on whether to reaffirm a debt should not be taken lightly. To start with, if a debtor doesn’t want to keep the property to which the debt is tied the answer is simple–don’t reaffirm the debt. Instead, simply allow the creditor to take the asset back and have the debt discharged.
If you want to keep the asset, the question becomes a little more difficult. In the case of an automobile loan, generally, if you have made your payments on time and you continue to make timely payments, you’re going to be able to keep the vehicle irrespective of whether you enter into an agreement reaffirming the car loan. The difference is that if you reaffirm the debt and subsequently default on the loan, the lender can seek to collect a money judgment from you personally; if you do not reaffirm the debt but stop making the payments after the debt is discharged and your bankruptcy case is closed, the creditor’s only remedy is to repossess the vehicle. For this reason, debtors’ lawyers and bankruptcy judges are apprehensive about allowing debtors to enter into reaffirmation agreements unless those agreements incorporate new terms, more favorable to the debtor (e.g., lower interest rate or reduction of the principal balance of the loan).
How Should a Debtor in A Bankruptcy Case Decide Whether to Reaffirm a Debt?
Because every situation is unique, debtors should have a serious conversation with their bankruptcy lawyers to determine whether it makes sense for them to reaffirm a debt. Creditors nearly always want debtors to reaffirm their debts. Debtors need to understand that by reaffirming a debt, they are giving up a signficant bankruptcy benefit–the discharge of their obligation to pay that debt. For that reason, talking to a Pittsburgh bankruptcy attorney is the most prudent course of action.
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