Learn About the Meaning of Debt Reaffirmation, and Understand How it Can Affect You During and After a Bankruptcy

A high tide of bills and debts can make it tough to manage financial affairs. Bankruptcy is an option if debts have become unmanageable. In a Chapter 7 bankruptcy, you allow a court-appointed trustee to liquidate non-exempt property to pay creditors. In Chapter 13 bankruptcy, the trustee sets up a repayment plan. (More about the difference between Chapter 7 and Chapter 13 bankruptcy) At the end of the process, the law allows the bankruptcy court to discharge (cancel) those debts that can legally be discharged.

A debtor in bankruptcy has the option to keep his property with a reaffirmation agreement. In a reaffirmation deal, the debtor and creditor agree to keep the loan current, with the debtor making the scheduled payments and the creditor not claiming the property, or any settlement on the debt from the bankruptcy. A reaffirmation would be one way to keep a mortgaged house that is headed for foreclosure, or a vehicle that is not protected in bankruptcy. In a reaffirmation, the creditor agrees not to foreclose on any lien on secured property, which is the opposite of a bankruptcy charge-off debt.

Creditors are usually happy to sign on to a reaffirmation because repossessing or foreclosing on property can be an expensive process, and a reaffirmation makes for one less written-off loan. A reaffirmation deal can work against a debtor, however. It may prevent a homeowner from refinancing or modifying a mortgage, or force him to continue paying back a loan on a damaged vehicle. The debt won’t be discharged in bankruptcy, and the loan balance will remain payable in full, along with interest and fees, after the bankruptcy case closes.

Reaffirmations must be approved by the court. The agreement is prepared by your bankruptcy attorney and then filed by the lender. The court then schedules a hearing on the matter. If a debtor is unable to show that he can afford to keep up the payments, the court has the option to deny the reaffirmation and return the property to the bankruptcy process. The court may also require a change in the terms, such as a lower interest rate or a lower monthly payment.

A debtor must close on a reaffirmation agreement before the bankruptcy case closes. If he changes his mind, he can cancel the reaffirmation up to 60 days after he files the bankruptcy petition, or until the bankruptcy discharge, whichever comes later. He must file a “notice of rescission” with the creditor and provide a copy to the bankruptcy court. If the reaffirmation agreement is cancelled, the creditor must return any payments made by the debtor, but also has the right to claim the property.

If a debtor has equity in a car or other property subject to a reaffirmation, he’s got to be careful about keeping up payments. Bankruptcy prevents repossession, but only temporarily. After the bankruptcy closes, the lender waiting for a past-due payment won’t hesitate to repossess the car in order to sell it and show the loan as paid in full. For many lenders, a single missed payment would be enough to take action.