Filing for bankruptcy can be a challenging and stressful process. One of the decisions you might face during a Chapter 7 bankruptcy is whether to sign a reaffirmation agreement. This agreement can have significant implications on your financial future. Here’s why you should carefully consider the consequences before signing.
What is a Reaffirmation Agreement
A reaffirmation agreement is a legally binding contract between you and a creditor. By signing it, you agree to repay a specific debt even after the bankruptcy discharge. This means you continue to be liable for the debt as if the bankruptcy had not wiped it out. Generally reaffirmation agreements are only advisable in some situations when the debt is secured by property such as a vehicle.
Reasons to Avoid Signing a Reaffirmation Agreement
- Continued Liability:
- Once you sign a reaffirmation agreement, you remain personally liable for the debt. If you fail to make payments, the creditor can take legal action against you, which could lead to wage garnishments or other financial penalties.
- Missed Opportunity for a Fresh Start:
- The primary goal of filing for bankruptcy is to obtain a fresh financial start by discharging most of your debts. Reaffirming a debt counteracts this benefit, as you are choosing to retain liability for a debt that could have been discharged.
- Potential Financial Burden:
- Reaffirming a debt could place an unnecessary financial burden on you. If your financial situation does not improve as expected, you may struggle to make the payments, leading to further financial distress.
- Impact on Credit Score:
- While a reaffirmed debt can help rebuild your credit if payments are made on time, it can also hurt your credit score if you fail to make payments. This risk should be weighed carefully against the potential benefits.
- Legal Counsel:
- It’s crucial to seek legal advice before signing any reaffirmation agreement. Your attorney can help you understand the full implications and determine if reaffirmation is truly in your best interest.
Alternatives to Reaffirmation
- Redemption:
- Pay the current market value of the property in a lump sum to the creditor, allowing you to keep the asset free and clear.
- Surrendering the Property:
- If you cannot afford the payments or the asset is not essential, you can surrender it to the creditor and discharge the associated debt.
- Pay and Retain:
- Most secured creditors with whom a reaffirmation agreement would arise arise—automobile lenders—generally allow you to keep the secure property (automobile) without entering into a formal reaffirmation agreement, so long as you keep your payments current. We call this the “pay and retain” method. While a creditor is not legally obligated, our experience is that most secured creditors will agree to the pay and retain method.
Reaffirmation agreements require your bankruptcy attorney, if you have one, to review your financial position following bankruptcy in Salt Lake and certify to the bankruptcy court that entering into the reaffirmation agreement will not cause an undue financial hardship. The bankruptcy judge must also approve the agreement.
Because it is difficult to predict a person’s financial future, our Salt Lake bankruptcy attorneys generally discourage our clients from entering into a reaffirmation agreement…unless absolutely necessary.
While the pay and retain method works well with most secured creditors, there are a minority of creditors who take the extreme position to repossess the secured property even if you are current. America First Credit Union is one of these creditors. In cases that deal with AFCU or other creditors who take the same position, it may be necessary to enter into the reaffirmation agreement in order to retain possession of the secured asset.
Reaffirmation agreements can seem like a good way to keep essential property, but they come with significant risks and obligations. Before signing, consider the long-term financial impact and explore all available alternatives. Consulting with a bankruptcy attorney can provide valuable guidance to ensure that your decision supports your goal of achieving a fresh financial start.
