Pros and Cons of a Reaffirmation Agreement
The purpose of bankruptcy is so debtors can sever ties between debt owners and themselves. However, there are situations where some debt is necessary, such as mortgages and car notes. During the bankruptcy petition process, attorneys will instruct debtors to sign a reaffirmation agreement with the secured creditor(s) whom hold the title to the secured interest, such as house or car.
Reaffirmation agreements aren’t to be used “recreationally”; they’re essentially new agreements to keep paying old debt. Today, we’ll discuss the pros and cons of signing these agreements, and what debtors can expect once they’re signed.
Pro: Debtor will maintain payment history
By keeping your car and mortgage through bankruptcy, debtors can keep building positive payment history, which will help once they reestablish credit down the road. Unless debtors have missed payments sporadically, reaffirming debt makes sense since new creditors will see responsible payment history, although one’s credit report may reflect the new agreement as “reaffirmed”.
Establishing positive payments, as your attorney may disclose, is an excellent way to maintain good credit health and will assist when larger purchases are imminent down the road.
Con: Lender doesn’t have to accept reaffirmation offer
Debtors can sign any agreement they choose. The lender has sole authority, however, as to whether they accept the new agreement, although most will especially if the loan balance is greater than the value of secured assets. If an agreement is rejected, you’ll receive further information from your mortgage lender or may receive notice of repossession if you’re reaffirming your vehicle. Since few will reaffirm credit card debt (as most credit cards are shut down shortly after bankruptcy is filed, anyway), including that debt in bankruptcy is suggested.
Pro: You end up with real property
Why reaffirm debt when there’s no benefit? You’ll undoubtedly want your car, which means the end result of paying that debt down is you’ll receive the title. Same with mortgage. Again, be judicious in choosing which debt you’ll keep as any damage to your items (like your boat, truck, zero-turn lawn mower) are your responsibility since new agreements may void warranties.
Many people are forced to reaffirm essential property so they’re able to live and work without becoming homeless after their bankruptcy. Click here for more information on reaffirmation agreements in bankruptcy cases.
Con: You cannot walk away from reaffirmed debt
Once you’ve locked yourself into a new contract with a creditor, you’re stuck with it until the end. You cannot renege on your contract after the bankruptcy as potential civil liability may befall. Therefore, choose which debt is worth keeping through your bankruptcy, and what debt can be paid for with your stated income. Cars and homes are the only debt you should reaffirm as they’re considered “essentials”.
How to start your agreement
Should you wish to reaffirm debt, your attorney will guide you through the form to sign. You may need to notarize the agreement before having it filed in court. Essentially, you may or may not attend a reaffirmation hearing depending on whether the company decides to accept or reject your agreement.
Once the agreement is approved and entered into court record, it’s legally binding. It cannot be reversed unless you’re able to prove you were coerced into signing the agreement. And, once you’ve entered into an agreement with one creditor, there’s a remote possibility other creditors may strongly encourage you reaffirm their debt, too.
Remember, you cannot refile Chapter 7 bankruptcy for eight years. If you cannot maintain payments for an extended period after your discharge, it’s best to let the secured interest go. And finally, attempting to file these agreements without an attorney could be dangerous if you’re unaware of technicalities, expectations and legalities of the agreement.