While getting rid of your debts through bankruptcy, you might want to keep some loans. This happens when you wish to keep the associated property (car or home) with you. You need to reaffirm the loan for this to occur. This means that you agree to be responsible for the debt as you wish to keep the collateral associated with it. The reaffirmation agreement is a new contract submitted to the bankruptcy court. However, you need to be current on your debt for this to occur. Apart from this, you must be able to protect all equity in the property using bankruptcy exemptions. If the property’s equity cannot be exempted, the bankruptcy trustee would sell the asset and the proceeds paid to unsecured creditors.
Reaffirming a debt means that you still owe the debt even after the bankruptcy case ends. When you reaffirm the loan, you can keep the collateral associated with the debt if you are current on the payment. You might also be able to negotiate new terms to reduce payment or interest rates. However, there are some disadvantages associated with reaffirming the debts. You are legally bound to pay for the debt after the bankruptcy discharge, even if the property is damaged or destroyed. Moreover, since you cannot file for another bankruptcy chapter before eight years, you end up paying back the debt for a long time. Finally, on reaffirming the debt, if you default on the payments after bankruptcy, the creditor can repossess the collateral and auction it to get what they owe.
Restrictions associated with the reaffirmation
Any property that has equity in it and cannot be protected using bankruptcy exemptions can be sold by the trustee to pay the lender. The exemption amount is handed over to the bankruptcy filer, and the remaining amount is used to pay unsecured creditors. Suppose the entire equity in the property can be protected. In that case, the reaffirmation agreement can be used to continue paying for property held by a lien. If the reaffirmation causes undue hardship, the judge can disapprove of the agreement.
When Should You Enter The Reaffirmation Agreement?
Since a reaffirmation agreement can leave you at a disadvantage, it should be done only if the creditor insists on it and you do not have any other way of keeping the collateral. Another important factor you should keep in mind is that you should be able to pay off the balance. Therefore, reaffirmation can help you retain some types of property (automobiles or homes). Moreover, it is also a sensible way to keep a property that is worth more than what you owe on it. It is important to keep in mind that when you decide to reaffirm a debt, try to get the creditor to agree to accept less than what you owe as full debt payment. Once you have reaffirmed any debt, staying current on the payments is important as you may end up losing the property if you default on the payments.