For most people, bankruptcy is considered an effective way to erase most, if not all, of their debts. The cost of achieving this financial freedom is typically the release of personal assets. But sometimes, individuals want relief from their obligations while holding onto their possessions – and in this article, we will discuss options to do just that via a reaffirmation agreement.
Keeping A Debt Secures Your Property
Under bankruptcy law, the creditor and the debtor may decide to waive the discharge of a debt through a process known as reaffirmation. With a mutual agreement between the parties, the debt will not be included in the bankruptcy proceeding.
Signing a reaffirmation agreement allows the debtor to remain committed to repaying their debt. They are then permitted to keep the collateral or the property that secures the debt. The bankruptcy court reviews this mutually-binding agreement.
Collateral Defined: When an individual opens a credit account or applies for a loan, the lender may ask for any valuable property owned which can secure the debt. If payments are not made, the bankruptcy trustee will sell off the collateral to pay the debt. Therefore, collateral guarantees that the lending company will be reimbursed for the money they loaned.
When a loan has collateral attached to it, it creates a “lien” on the property. This lien gives your creditor “temporary ownership” – and the right to repossess the home or vehicle if the debtor is behind on payments. A lien represents ownership interest that is legally in place until the borrower pays off the debt.
Creating liens with collateral is common practice among banks and other lending institutions. Banks who seek reimbursement from a borrower in default file a secured claim with the court. When someone does not make a monthly payment, the creditor can use the property lien to repossess and sell it to pay the loan balance. The bankruptcy trustee will repay them using the money from the liquidated assets.
However, when an individual chooses to reaffirm their loan, they create a legal promissory note that allows the loan to outlast the bankruptcy petition, avoiding property seizure.
Reaffirmation: The Pros and Cons
You may wonder why someone would choose to keep their debt rather than have it erased. Aside from keeping the personal property, a reaffirmed debt also offers the following benefits:
- Leverage when negotiating a reduction in payments and terms
- Lowering the loan’s interest rate
- Reducing the total balance
- Improving a personal credit report (lenders are required to update loan status to the credit reporting agencies)
There are also disadvantages to reaffirming loans, such as debt remaining after the bankruptcy case is closed and the debtor being required to pay off any deficiency balance. Additionally, the home or property may be repossessed if there is second default.
How Reaffirmation Works
Not all borrowers are eligible to file for bankruptcy with reaffirmation terms. To do so, an individual must meet the following criteria:
- The loan payment is current
- Any equity in your property must be protected with a bankruptcy exemption
- The debtor must be financially able to pay back the debt
- The creditor agrees to the agreement in bankruptcy court
If you are interested in filing bankruptcy with a reaffirmation agreement, your bankruptcy attorney is required to sign the contract and vouch for your financial capacity. To learn more about your options, call the offices of Richard V. Ellis today.
Richard V. Ellis is a Sarasota-based bankruptcy and family law attorney.