When an individual goes through bankruptcy, they typically have their debts discharged at the end of the process. However, there may be circumstances when a debtor may decide to pay some debts which might otherwise be released; and this is accomplished through a reaffirmation agreement.
A reaffirmation agreement is a voluntary document that allows a debtor to opt to pay all or part of a debt, typically discharged in the bankruptcy case. This agreement must be filed within 60 days after the creditors meeting. Of course, a debtor can always decide to repay any debt independently, but as of October 2005, there are situations when signing a reaffirmation agreement may be your best option.
Attorneys represent that signing a reaffirmation agreement will not be difficult for their client. The court may speak to the individual directly to ensure that they know the agreement is voluntary, not required by any state or federal law. A judge may, in their discretion, refuse to permit a reaffirmation agreement as a binding agreement.
A reaffirmation agreement removes the complete “fresh start” offered by debt discharge, and many attorneys advise against signing one. Even after signing the agreement, the debtor may change their mind for up to 60 days after the agreement is filed with the court. They simply need to provide a written document to the court indicating that they have changed their mind.
Before October 2005, there were four choices regarding secured debt in Chapter 7 bankruptcy.
1. Redemption – buying the value of the asset from the creditor
2. Surrender – giving the asset back to the creditor
3. Reaffirmation – as discussed
4. “Keep and Pay” – the debtor keeps paying to keep the secured item
After the bankruptcy law was changed in 2005, the status of “keep and pay” was removed from the Act. Each state will decide if they want to provide for a “keep and pay” option.
How Reaffirmation Works
When an individual reaffirms a debt, they agree to remain liable for that debt – even though it could be discharged. The debt may retain the terms of the original contract or may be renegotiated with the creditor.
Many creditors will only agree to a reaffirmation agreement on the original contract terms. A reaffirmation agreement is a legal agreement that must be agreed upon by all parties.
Most reaffirmations involve vehicle loans. Other debts may be reaffirmed as well, but it is typically not done. If you have another debt obligation you would like to reaffirm, you should consult with a Sarasota bankruptcy attorney.
Three Alternatives to Reaffirmation
1. Surrender: An individual can surrender the secured property to the lender to discharge the debt. Surrender is a good option when the debt is large or the car is worth significantly less than what you owe.
2. Redemption: If your car is valued at an amount less than you owe, an individual can redeem it by paying the current book value. The creditor will typically forgive the balance of the loan. It is important to point out that the individual will be required to pay the lender in a lump sum under this option in a Chapter 7 bankruptcy. In a Chapter 13, you can pay the redemption value over the life of the Chapter 13 Plan.
3. Ride Through: This option is also known as “retain and pay.” This option allows for the individual to continue making payments on the debt and keep the vehicle if the creditor does not require a reaffirmation agreement. If you subsequently fall behind in payments, the lender may repossess but not pursue any deficiency.
If you would like to learn more about your personal bankruptcy options, call Sarasota attorney Richard V. Ellis. He and his team will discuss your situation with you and help you to decide on the best course of action for you.