Filing for bankruptcy offers a chance to get a fresh start when one’s debts—whether personal or professional—have become more than one can possibly repay. Debts are generally categorized as either dischargeable (one does not have to repay it) and non-dischargeable (one still has to repay it even after bankruptcy).
A person filing for bankruptcy can choose to repay a dischargeable debt. If the debtor (person who owes the money) enters into a contract to repay a dischargeable debt, this is called a reaffirmation agreement. There are circumstances when these kinds of agreements would make sense for a person entering bankruptcy. However, the terms of the contract should be carefully crafted and considered before signing.
If you are filing for bankruptcy and are considering entering a reaffirmation agreement—or the creditor is insisting on one—speak to an attorney right away.
When to Consider a Reaffirmation Agreement?
There are two situations in which a person might consider a reaffirmation agreement:
- The creditor has a security interest in an asset such as a building or vehicle, that would allow them to repossess the asset to repay the debt. The affirmation agreement offers an opportunity to retain the asset during and after bankruptcy proceedings.
- The debt was co-signed or guaranteed by another person who would have to repay the debt if the debtor has it discharged.
All reaffirmation agreements are voluntary. A person is never required to enter these agreements during bankruptcy proceedings.
While a person may be tempted to reaffirm a debit retain certain assets, such as a vehicle, there are many factors to think about before doing so. For example, how necessary is the vehicle? Is there a lower-cost alternative to keeping the asset (i.e. buy a used car to replace the repossessed one)?
Similarly, it should be confirmed first that the creditor does, in fact, have the legal right to repossess the asset upon default.
Most importantly, however, one must ensure that he/she can satisfy the terms of the reaffirmation agreement. For example, even with a lower interest rate and smaller monthly payments, it may still not be possible to afford the financial obligation.
What Are the Dangers of a Reaffirmation Agreement?
Simply put, a reaffirmation agreement obligates the debtor to repay money owed that otherwise would have been discharged during bankruptcy. However, there are several reasons to not enter such agreements, including:
- If the new payment schedule cannot be met, the debtor can be sued. Likewise, if the debt is tied to an asset, the asset can still be repossessed.
- A person can only file for bankruptcy every 8 years, so if the reaffirmed debt ends up being too much, it could lead to serious challenges down the road.
How to File a Reaffirmation Agreement
A reaffirmation agreement must be filed with the bankruptcy court within 60 days of the first meeting of creditors in a bankruptcy case. Each bankruptcy court has specific paperwork and guidelines for filing reaffirmation agreements. The exact procedures can be found on the website of the bankruptcy court in which one is filing.
Why Hire an Attorney for a Reaffirmation Agreement
Anyone filing for bankruptcy should hire an experienced attorney to help with the process, even if a reaffirmation agreement is not being considered. In cases involving possible reaffirmations, an attorney can suggest alternative options, advise on the terms of the agreement, and ensure that the agreement is in the best interest of the debtor.
Frequently Asked Questions
Who Should I Contact?
If you or someone you love is filing for bankruptcy, contact the attorneys at Rosenblum Law today. Our experienced attorneys will help walk you through the process. We will work hard to ensure the best possible outcome for your case.