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What Is Reaffirmation of Debts in Chapter 7?

CH7

During a Chapter 7 bankruptcy case, you may have the choice of keeping an asset that you owe money on, such as a car. If you can afford to keep making the payments and want to keep this asset, your lawyer will recommend signing a reaffirmation agreement. Here are several things you should know about reaffirmation of debt in a Chapter 7 case.

What Does Reaffirming a Debt Mean?

When you file for Chapter 7, the court will discharge any qualifying debts you have. Discharging of debts is the process of forgiving the debts, leaving you debt-free. If you owe money on your car, for example, and want to keep your car, you have the right to do so; however, you must reaffirm the debt.

To reaffirm the debt, you must sign a reaffirmation agreement. This agreement states that you wish to keep the car and agree to make the payments according to the same payment schedule. In other words, you agree to keep the current loan you have and make every payment as you originally agreed.

Once you sign this agreement, your lawyer will send it to your car lender, and your lender must sign it for it to be a legally binding agreement. If your lender agrees to it and signs it, you can keep your car, and you must keep making your payments. If your lender does not agree to it, the lender may repossess your car and you could then stop making your payments on the car.

One of the only reasons a lender would not agree to a reaffirmation agreement is if the person was behind on payments. If you are currently behind on payments of an asset you want to keep, you might experience trouble getting the lender to agree to accept the reaffirmation agreement.

When Is Reaffirming a Debt a Good Idea?

You can reaffirm almost any type of loan you have if there is collateral involved. For example, if you own a house and want to keep it, you could reaffirm the loan with your mortgage lender, but you should only reaffirm a loan if you can make the payments on it.

If, for example, you need a car and know for sure you can continue to pay for it, reaffirming the car loan is a good idea. If you did not reaffirm it and ended up losing the car to repossession, you might have trouble qualifying for another car loan right away. If this happens, how would you purchase a car to use to get to and from work?

Additionally, if you have a good interest rate on your current loan, keeping the loan would probably be less costly than trying to find a different loan after filing for bankruptcy.

Are There Risks Involved When You Reaffirm a Debt?

The main risk you have if you reaffirm a debt is what would happen if you failed to make the payments on it. For example, if you reaffirmed your car loan and could not afford the payments, the car loan lender could come after you for the car and the amount of money you owe on the car.

If you had not reaffirmed the debt, the lender could take your car but could not pursue you for the money you owed on it.

If you cannot find a way to pay off the debts you owe, consider filing for Chapter 7. To find out if you qualify for this branch and the effects it would have on your finances, contact Terry E. Hurst, Attorney at Law today to speak with a bankruptcy lawyer.‚Äč