What Does it Mean to Reaffirm Debts During Bankruptcy?

 Posted on December 22, 2022 in Bankruptcy

Are you considering filing for bankruptcy and have questions about the process? One question that often arises in these situations is whether you should reaffirm certain debts. Reaffirming a debt means you are willing to repay a debt that would otherwise be discharged through bankruptcy. It is important to understand the implications of reaffirming a debt before deciding if this is the right path for you. Understanding the process of reaffirming a debt and the obligations that may apply to you in these situations can help you make the best decision for your financial future. 

What Is a Reaffirmation Agreement?

Reaffirmation is the legal term used when a debtor chooses to remain liable for payment of a specific debt after filing for bankruptcy. In a reaffirmation, a debtor will enter into an agreement with a creditor wherein they will agree to pay back all or part of the debt that would normally be discharged during bankruptcy. By signing this agreement, the debtor legally takes on full responsibility for repaying the debt, including any interest and fees associated with it. This agreement must be approved by both parties, as well as by the court handling the bankruptcy case. 

The most common types of reaffirmation agreements involve secured debts such as mortgages and car loans. By agreeing to reaffirm the debt, the debtor agrees to continue making payments on these debts even after their bankruptcy case has been discharged. 

Benefits of Reaffirmation Agreements 

Reaffirmation agreements can be beneficial for both creditors and debtors in certain circumstances. For creditors, reaffirming a debt provides assurance that at least some of the debt will eventually be repaid, which can help them minimize their potential losses. For debtors, reaffirming a loan may provide benefits such as improved credit scores or access to additional financing options in the future. 

However, the main advantage of reaffirming a debt is that it allows a debtor to keep an asset that would otherwise be lost in their bankruptcy case. For example, if a person has equity in their home, but is unable to keep up with their mortgage payments, they may agree to reaffirm the debt in order to keep their home after their bankruptcy is finalized. In these situations, a creditor may agree to loan modifications that will ensure that the debtor will be able to afford ongoing payments. Similarly, if a person wants to keep a car loan and can afford to continue making payments, then agreeing to reaffirm the debt will enable them to do so without having the vehicle repossessed by the lender during their bankruptcy case. 

The Disadvantages of Reaffirmation Agreements 

One major disadvantage of entering into a reaffirmation agreement is that it binds a person legally and financially and prevents them from eliminating reaffirmed debts. This means that if a person is unable to make payments on the debt in the future, the lender will still be able to take action against them, including foreclosing on a home after a mortgage default or repossessing a vehicle after missed auto loan payments. Additionally, if interest rates have gone up since the loan was originally taken out, then those higher interest rates may apply when entering into a reaffirmation agreement with the lender—which could mean higher payments going forward. It is important to consider these factors before deciding whether to enter into a reaffirmation agreement with a lender.

Contact Our New Braunfels Bankruptcy Lawyer

If you are considering bankruptcy and are unsure about whether you should reaffirm certain debts, there are several things factors you will need to consider. You will want to look at your current financial situation, how much money you owe, and how the assets you own will be affected during bankruptcy proceedings. At the Law Offices of Chance M. McGhee, our Kerrville bankruptcy attorney can help you weigh all of these factors carefully to determine if reaffirmation is right for your specific situation. We will help you take the correct steps to receive relief from your debts while minimizing your financial losses. Call our office today at 210-342-3400 to arrange a free consultation.

Sources:

https://www.investopedia.com/terms/r/reaffirmation.asp

https://www.bankrate.com/loans/personal-loans/reaffirmation-agreement/

https://www.uscourts.gov/sites/default/files/b_240a_0410.pdf