Understanding A Reaffirmation Agreement And The Pros And Cons Involved

Are you going through bankruptcy but want to keep your car or stay in your home? A reaffirmation agreement may be the tool you need to keep your prized possessions. However, you will still have to make payments on the debt as you journey through the economic uncertainty of bankruptcy. Follow along below to see if this option is right for you.

What Is A Reaffirmation Agreement?

If you are going through bankruptcy, a reaffirmation agreement will allow you to retain responsibility for certain debts if you continue to make payments on them. If you have debt with important collateral that you wish to retain ownership of, such as a car loan or a mortgage, reaffirmation agreements will allow you to keep the collateral instead of selling it to pay your creditors. Reaffirmation is most commonly used in Chapter 7 bankruptcy.

When You Should Use A Reaffirmation Agreement

There are two paramount considerations when thinking about using a reaffirmation agreement:

• You need to keep an asset. If you use your car every day to get to work, you probably don’t want to lose it in bankruptcy. Even more importantly, a reaffirmation agreement could allow you to stay in your home. Keeping these assets that are integral to your daily life may be worth it if they allow you to continue to live comfortably and rebuild your financial well-being after bankruptcy.
• You can continue to make payments. While reaffirmation agreements allow you to retain ownership of your essential assets, the most important question to consider is whether you can continue paying for them. If you fail to make payments on reaffirmed debt, the assets are given no protection from your bankruptcy agreement. That means your creditors could repossess your car or foreclose on your home. That’s why it is essential to analyze your finances to determine whether you can continue making certain debt payments.

How Does The Reaffirmation Of Debt Work?

The reaffirmation of debt allows you to keep an asset that secures a debt. It informs the lender that you intend to continue to pay the loan. And they will continue to report all your payments to the credit bureaus. If you miss or stop making payments, the creditor can recover the property that secured the loan.

How To Request A Reaffirmation Agreement

You can request a reaffirmation agreement after you file for bankruptcy but before your debt is discharged. Once your debt is discharged, meaning you are no longer required to make the payments, you can no longer request a reaffirmation agreement.

Once you and your creditor agree on the terms of your reaffirmation agreement, you must sign and file the necessary documents with a bankruptcy court. If you have second thoughts about the agreement and want to cancel it, you can rescind the agreement before your discharge or within 60 days of filing the agreement with the court, whichever option gives you more time.

Pros And Cons Of Reaffirmation Agreements

There are several pros and cons to reaffirming debts. Let’s take a look at these below.

Pros

• It is voluntary: Whether or not to sign a reaffirmation agreement is always the borrower's choice. A lender can’t force you to reaffirm the debt you owe them during bankruptcy procedures. This gives you the freedom to make the decision that works best for you.
• Continue to enjoy the secured asset(s): Bankruptcy doesn’t mean you have to lose access to every asset you borrowed. If you still need and can still pay for borrowed assets important to your daily life, you can retain them with a reaffirmation agreement.
• Rebuild your credit score: The more debt payments you continue to make, the better your credit score will be. Staying up to date on large assets such as a house or car will go a long way toward rebuilding your credit score after bankruptcy.

Cons

• Your lender could seize your home or car. Just like before your bankruptcy, if you fail to make payments on secured debt, your lender could take ownership of the asset securing the debt. So if you don’t pay your mortgage that’s part of a reaffirmation agreement, you could lose the home through foreclosure.
• You could owe the deficiency. Your troubles may not stop at just losing your home or car. If the asset securing the loan is worth less than the loan amount, you could owe your lender the difference between the two amounts. So, if you owe $200,000 and your lender forecloses on your home that’s only worth $175,000, you could owe the lender an additional $25,000.

When Do You Need To Sign A Reaffirmation Agreement?

It’s essential to know that you are never legally obligated to sign a reaffirmation agreement. However, if you are going through bankruptcy procedures and wish to retain ownership of some of your most useful borrowed assets, a reaffirmation agreement may be right for you. 

Remember to only enter into a reaffirmation agreement if you are sure you can continue to make the payments on the loans. Your credit score and long-term financial well-being could be hurt even more in the long run if you fail to make payments on reaffirmed debt. If you don’t sign a reaffirmation agreement, you will lose some valuable assets, but you may be in a better financial position without making payments on assets you can’t afford.

The Bottom Line: Reaffirmation Can Help You Keep Your Assets

Reaffirmation of debt is a voluntary tool to keep your most important assets as you go through bankruptcy. While reaffirmation is a great way to retain control of useful assets such as your car or home, it is essential to ensure that you can afford to make the loan payments or risk losing the assets.

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