Reaffirmation Agreements in Bankruptcy Cases
A Chapter 7 bankruptcy features asset liquidation for the purpose of getting debt dismissed. In some situations, however, a debtor may enter a reaffirmation agreement with a creditor. The reaffirmation agreements in bankruptcy cases mean that you as the debtor will have to continue making loan payments as if the bankruptcy itself had never occurred.
What is a Reaffirmation Agreement?
The United States Bankruptcy Court District of Arizona defines a reaffirmation agreement as an agreement in a Chapter 7 bankruptcy that makes the debtor continue paying dischargeable debt after the bankruptcy.
The purpose of entering reaffirmation agreements in bankruptcy cases is typically to keep a collateral. In the case of an auto loan, for example, the collateral would be the car. This collateral will otherwise become the subject of repossession if you cannot make the payments.
In essence, the debtor waives their right to a discharge for the specific loan in an attempt to protect the collateral.
Here’s what could potentially happen in the aftermath of a bankruptcy discharge. When a debtor with a security interest is not being paid, the discharge will free the person from having to pay the loan back. The asset that acted as a security, however, will be repossessed. Needless to say, nobody wants to lose their car or their house.
Reaffirmation Agreement Procedures in Arizona
Filing a reaffirmation agreement with court is a relatively simple process. The party initiating the procedure will have to file both the agreement and a Reaffirmation Agreement Cover Sheet. Both the debtor and the creditor have to sign the agreement before it gets submitted for court approval.
After all necessary documents are submitted, the court will schedule a hearing before a bankruptcy judge for the purpose of deciding whether the agreement is going to be approved.
The Arizona bankruptcy court can turn a reaffirmation agreement request down. It may be possible for the judge to instead enter a prohibiting order. The prohibiting order prevents the creditor from repossessing the assets of the debtor, as long as adequate payments are being made.
Do You Really Need a Reaffirmation Agreement?
The biggest question about this option is whether you really need a reaffirmation agreement in the case of bankruptcy.
There are certain risks when you opt for a reaffirmation agreement. You will be on the hook for the entire amount that you owe to the creditor and that is not going to get discharged in the bankruptcy. If you fail making payments, chances are that you will lose an asset (a vehicle repossession, property foreclosure, etc.).
For most people, bankruptcy is all about a fresh start. This is why they prefer to let go of non-exempt assets and get the debt discharged. Once debt is dealt with, the family or individual will get an opportunity to start building their life from scratch.
Usually, people will enter a reaffirmation agreement in order to keep their car. The decision is often distinctive because a debtor cannot keep a vehicle that they owe money on. An initial reaction would be to attempt keeping the vehicle, regardless of the circumstances. Before jumping on the reaffirmation bandwagon, however, you will need to ask yourself a few important questions.
The first one is does the asset you want to keep have a higher value than the debt you have to repay? You will also have to calculate the monthly payments and whether you’ll be capable of making those. If you can’t, chances are that the asset in question will be lost anyways.
Usually, debt will be reaffirmed in a Chapter 7 bankruptcy only when such a measure is deemed to be absolutely, 100 percent necessary. If you are swayed in the direction of reaffirming debt, talk to a bankruptcy lawyer before moving forward with the procedure. Chances are that you will reconsider, once you get to understand the full implications.