When a Chapter 7 bankruptcy case is pending, a reaffirmation agreement can be drawn up and entered into that stops the particular debt it applies to from being discharged or replaces it with a new agreement. In simpler terms, the debtor enters into a contract with an obligation to repay that debt after the bankruptcy case is completed. The debtor forfeits bankruptcy protection in exchange for the creditor promising not to repossess the property.
Reaffirmation isn't always the best idea and should be entered into with a firm understanding of what is expected of you as well as the creditors options if you do not meet your obligations. Reaffirmation agreements are generally used for secured debt because such agreements allows the debtor to retain the collateral and preserves the right of the creditor to enforce the debt according to contractual or modified terms.
If a debtor defaults on a secured obligation, the creditor can view that as a default that accelerates the loan. Many contracts have acceleration clauses where the entire amount can be considered due upon default. If you are unable to pay the creditor, then the creditor may try to repossess the collateral (i.e. your car). Reaffirmation can be a way for you as the debtor to maintain this collateral after the bankruptcy is over.
Pros and Cons of Reaffirmation Agreements
- It can provide a way for the debtor to retain the collateral even after the bankruptcy proceedings is over, rather than having the collateral repossessed.
- If you need your car for transportation, such as commuting to work, then this agreement would allow you to keep it.
- The payments will be reported on your credit report if you sign the reaffirmation agreement.
- If you are late on any future payments, your credit can be adversely affected.
- If you fail to make the required payments, the creditor can repossess the collateral.
- If you later fall behind, you may be left with a car payment but no car to drive.
- The vehicle may be "upside down" so that reaffirmation is does not represent a good financial investment.
- You can then be sued by the creditor for the balance of the reaffirmed debt
- You won't be able to file bankruptcy again for 8 more years.
- You should be confident that you will be in a financial position to repay the debt. An experienced bankruptcy attorney may be able to help you assess whether reaffirmation is a good option.
Some car finance companies will allow debtors to stay current on the lien and keep making payments without a formal reaffirmation agreement. While this may mean that the finance company cannot pursue a deficiency judgment for the difference between the value of the vehicle and the outstanding loan balance, it also means that you may have little protection against a hasty re-possession effort.
A Southern California bankruptcy attorney can help greatly if you are considering entering into a reaffirmation agreement. This is the time to renegotiate the terms of the loan to try and reduce interest, principal and even extend the loan terms. Again, these agreements are not always in your best interest. If you change your mind on the reaffirmation agreement after signing it, you also have 60 days to revoke it. The agreement also has to be approved by the court in most cases.
At Southern California Law Advocates, P.C., we represent clients throughout Southern California who are struggling with crippling debt. We understand how people have been hurt by the economic slowdown and are here to help. Call us today for a free initial case evaluation at 1-866-337-7220.