Bankruptcy offers a financial lifeline to many people who find themselves drowning in unmanageable debt. However, the process isn’t exactly the same for everybody.
You may find yourself in a position where you need to decide if you want to keep a debt by “reaffirming” it or let it (and probably some property) go. Let’s take a look at that process.
How does reaffirmation work?
A reaffirmation agreement is a legal contract between a debtor and a creditor during a Chapter 7 bankruptcy. Reaffirmation means that the debtor voluntarily agrees to continue paying a particular debt, even though that debt could be discharged through bankruptcy.
Reaffirmation is often used in situations where the debt is secured and the debtor doesn’t want to lose the particular asset that is being used as collateral. For example, you might reaffirm a car loan (sometimes with the debt reduced to the car’s actual market value) so you can keep the vehicle. If you have a mortgage, a home equity line of credit or a home equity loan, reaffirmation allows you to keep your home as long as you stay current on your payments.
Unless a secured debt is reaffirmed, the creditor will eventually petition the bankruptcy trustee to repossess the property – and that can happen even if you’re current on payments. While the bankruptcy hold is in place, you may be able to negotiate better terms on your debt repayment schedule, changes in the interest rate, reduction in the debt itself and other things. It’s crucial to have experienced legal guidance as you do this.