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What Is a Reaffirmation Agreement in Chapter 7?

In Chapter 7 bankruptcy, a reaffirmation agreement allows a bankruptcy filer to reaffirm a secured debt owed to a creditor, promising to continue to make payments on the debt in exchange for keeping the asset held as collateral. In most cases, people seek reaffirmation agreements to avoid losing their homes and vehicles.

Because this can be a complicated aspect of Chapter 7 bankruptcy, we’ll discuss this topic in greater detail below. Should you have questions regarding your specific legal situation, it’s always best to consult with a bankruptcy lawyer for personalized assistance.

What Is the Purpose of a Reaffirmation Agreement?

At first glance, reaffirming a debt after filing for bankruptcy may seem counterintuitive. However, there are valid reasons why debtors might choose to enter into reaffirmation agreements. One primary motivation is to retain ownership of essential assets, such as a vehicle needed for transportation or a home. By reaffirming these debts, debtors can maintain possession of these assets and continue to make payments, thus avoiding repossession or foreclosure.

Moreover, reaffirmation agreements can help rebuild a debtor's credit history post-bankruptcy. By demonstrating a commitment to repay certain debts, debtors may improve their creditworthiness over time, albeit gradually.

How Does a Reaffirmation Work?

Reaffirmation agreements must adhere to specific guidelines outlined in bankruptcy law to ensure fairness and transparency for all parties involved.

Some essential components of these agreements include:

  • Disclosure of terms: The agreement must clearly outline the terms of the reaffirmed debt, including the principal amount, interest rate, repayment schedule, and any applicable fees or charges.
  • Certification of affordability: Debtors must demonstrate that they have the means to fulfill the obligations outlined in the reaffirmation agreement without experiencing undue financial hardship.
  • Approval by the bankruptcy court: Reaffirmation agreements require approval by the bankruptcy court to ensure that they are fair and equitable to both the debtor and the creditor. The court will assess whether entering into the agreement is in the debtor's best interest.
  • Right to rescind: Debtors have the right to rescind or cancel a reaffirmation agreement within a specified timeframe after it has been executed, providing an additional layer of protection.

What Are the Risks of Entering into a Reaffirmation Agreement?

While reaffirmation agreements offer certain benefits, they also carry inherent risks that debtors should carefully consider before entering into such agreements.

One significant risk is the potential for financial strain if circumstances change, such as a job loss or unexpected expenses, making it difficult to meet the reaffirmed debt obligations.

Additionally, reaffirming debts may limit a debtor's ability to pursue alternative debt relief options in the future. Because reaffirmed debts are not discharged in bankruptcy, debtors remain liable for these obligations even after receiving a bankruptcy discharge, which could hinder their ability to achieve a fresh financial start.

Contact a Lawyer for Personalized Guidance

Given the complexities and implications associated with reaffirmation agreements, it's advisable for debtors to seek guidance from a qualified bankruptcy attorney before making any decisions. An experienced attorney can provide invaluable insight into the potential consequences of reaffirming debts and help debtors navigate the bankruptcy process with confidence.

You can find such representation with Nguyen Law Group. Our bankruptcy lawyer is a well-seasoned advocate for our clients. He can provide you with the legal advice you need to understand your options and the services required to move forward.

Learn more during a free initial consultation. Contact us today to request one.