Do you plan to file bankruptcy but want to keep certain loans? If so, signing a reaffirmation agreement can help you retain your property. For most debtors, bankruptcy is seen as a means to wipe out most, if not all, debts and achieve financial freedom, even at the cost of giving up certain assets. But what if you want debt relief and still keep the possessions you worked so hard for? Below is an overview of how the reaffirmation process can help you achieve that.
If you need help with the bankruptcy process or understanding the bankruptcy code, make sure to consult a licensed bankruptcy attorney within your jurisdiction. Working with a legal representative helps you avoid the most common mistakes that can lead to an unsuccessful bankruptcy filing.
Keeping A Debt Secures Your Property
Under bankruptcy law, when the lender and a debtor mutually agree to waive the discharge of an otherwise dischargeable debt through the legal process called reaffirmation, it will no longer be included in the bankruptcy proceeding.
Signing a reaffirmation agreement essentially means you elect to remain committed to repaying what you owe. In return, you get to keep the collateral or the property that secures your debt. This mutually-binding contract is submitted to and reviewed by the bankruptcy court.
What are collaterals? When you open a credit account or apply for a loan, the lending institution may ask for any valuable property they can have. This “collateral” will be sold off if you miss making payments or fail to continue your loan agreement. As such, collaterals assure lending companies that they will get back the money they loaned to you.
When a loan has collateral, it becomes secured with a “lien” on the property. Liens refer to temporary ownership while the borrower hasn’t paid back the loan in full. This lien gives your creditor a right to repossess your home or vehicle if you’re not currently on payments or behind on your mortgage. Securing a loan with collateral creates a “lien” on the property—a type of ownership interest that remains until the borrower pays off the debt.
Securing debts is a common practice among banks. Secured debts are anything other than credit cards, personal loans, or medical and utility bills. When banks want reimbursement from a defaulting borrower, they will simply file a secured claim in court. Then, the bankruptcy trustee will repay them first using the money generated from the bankruptcy filer’s liquidated assets.
Not Reaffirming Your Properties
In a typical bankruptcy application with no intent to reaffirm the debt, you will no longer have the legal obligation to pay after a bankruptcy discharge. Normally, when you fail to give your monthly dues, the creditor can use his lien on the property to seize it, sell it, and use it as payment for your balance. But when you reaffirm your loan, you are legally creating a promissory note that helps the loan survive the bankruptcy petition and prevents any property foreclosure or seizure.
Pros and Cons of Reaffirmations
- Leverage when renegotiating a reduction in your payment terms
- Decreasing your loan interest rate
- Lowering the total amount you have to pay over time
- Positive impact on your credit report since lenders must update your loan status and timeliness of payments to a credit reporting agency
However, there are also disadvantages with reaffirming loans, such as the inability to escape your debt once the bankruptcy case is closed and being liable to pay off your deficiency balance. If you default on paying a second time, your car or property can still be repossessed.
Not all borrowers are qualified to file for bankruptcy with a reaffirmation deal. If reaffirming a loan is important to you, you must meet the following criteria:
- Your loan payment should be up-to-date
- Any equity in your property must be protected with a bankruptcy exemption (equities not covered by bankruptcy exemptions will be included in your bankruptcy estate and sold by your trustee in bankruptcy to pay off unsecured debts)
- You are financially capable to pay back your dues (the judge will consider if reaffirming a debt may lead to undue hardship post-bankruptcy)
- Your creditor should agree to sign the agreement in bankruptcy court
If you’re filing bankruptcy and reaffirming a debt, your bankruptcy lawyer must sign the contract and attest to your financial capacity. It is better to work with bankruptcy attorneys because self-represented filers are required to sit in a reaffirmation hearing.
The best time to enter a reaffirmation agreement is when your creditor insists when you don’t have an alternative way to keep your collaterals, and your income is enough to avoid defaulting from payment in the future.
Considering bankruptcy with reaffirmation? Speak with one of our bankruptcy lawyers from WantAFreshStart, LLC to valuable legal advice. We offer help for those reaffirming or redeeming