One of the more difficult decisions you will have to make during a bankruptcy is whether to reaffirm certain types of debt. While one of the primary purposes of bankruptcy is to eliminate as much of your debt as possible, you may want to reaffirm a debt if the creditor has a valid security interest in the property which gives them the right to repossess the property if you stop making payment. You should consult with your bankruptcy attorney before deciding to reaffirm any of your debts.
How Reaffirmation Agreements Work
While bankruptcy will discharge most types of debt, it will not affect the validity of liens on specific pieces of property. Therefore, if a creditor has a lien on your car to secure your auto loan, that creditor can use the lien to repossess your vehicle, even after you receive your discharge.
In many cases, you may want to let the creditor take the property. It can be difficult to walk away from your house, car, or other property, but the goal of bankruptcy is to give you a fresh financial start. Reaffirming debt limits your ability to start over with as much disposal income as possible.
You should only reaffirm debt when you really need to keep the property and you are sure you can afford to make your payments. You won’t be able to receive another Chapter 7 discharge for eight years, so you should not sign a reaffirmation agreement unless you are able to take on the responsibility of paying the debt back.
Negotiating a Reaffirmation Agreement
You may able to negotiate more favorable terms in your reaffirmation agreement than you had on your original loan. It costs creditors time and money to take back your property and attempt to find someone else who wants it. You might be able to get a better interest rate or reduce the amount of money you owe in some cases.
You also have the option to pay off the property in full. You can offer the creditor the fair market value of the property, which may be less than the amount you still owe on the loan.
Consult with your bankruptcy attorney for help deciding whether to reaffirm any of your debts, and for assistance negotiating your reaffirmation agreement.
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