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What is a Reaffirmation Agreement During Chapter 7 Bankruptcy?

So, you have filed for bankruptcy, but you have a secured loan. A secured loan is one in which the creditor holds a security interest in your property such as a vehicle loan or a mortgage. You have expressed an intent to keep the property and the creditor mentions a reaffirmation agreement. So what is a reaffirmation agreement? It is a whole new contract during the Chapter 7 bankruptcy in which you agree to owe all of the money owed on the loan and keep current. If you do not sign one, you might walk away and get rid of the debt. A reaffirmation agreement means you cannot do this and will owe it all.

There are several important factors to consider in deciding whether to enter into a reaffirmation agreement during your Chapter 7 bankruptcy. First, is it necessary to keep the property secured by the loan?  If the creditor is a credit union, then they will usually require that you enter into a reaffirmation agreement to keep the property even if you are current on your payments. Other creditors may allow you to just keep making voluntary payments and keep the property until it’s paid off.

A second factor is whether there is a co-signer on the debt or not. A discharge does not release any co-signers from the debt unless they file a Chapter 7 bankruptcy too. You may need to sign a reaffirmation agreement so that the co-signer does not get sued for the debt when you surrender the property. In a typical Chapter 7, you can stop paying a vehicle loan and surrender (give back) the property. When you do this, the creditor can sell the vehicle at an auction, but the difference in what they sell it for and what you owe (sometimes called a deficiency) can be discharged in the Chapter 7 bankruptcy.

A third factor to consider is whether the property that secures the loan is a necessity or not. If the property is necessary, such as your home, then it would be reasonable to enter into a reaffirmation agreement. However, if the property is unnecessary, such as a second vehicle, it may continue the financial hardships that caused you to file bankruptcy in the first place and would not be a good budgetary choice to keep it.

A fourth factor is whether the vehicle securing the loan can be replaced by another, more affordable, one. If you can replace the car or truck with a more affordable one by financing less money or paying cash for it after the bankruptcy, then it may be unreasonable to enter into a reaffirmation agreement. This is why you should speak to your bankruptcy attorney in Birmingham or wherever you live to determine if reaffirming the debt is in your best interests.

The biggest consideration is determining whether to enter into a reaffirmation agreement or not, is whether you can afford the debt. If you cannot afford to pay for it, then signing a reaffirmation agreement would not be a good idea since you would become personally liable for the indebtedness all over again when the bankruptcy is over. This is one of many considerations when filing a Chapter 7 bankruptcy that you should discuss with your bankruptcy attorney before deciding to file or not.