How Reaffirmation Agreements Work

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When an individual files for bankruptcy and the plea has been approved by a proper court, the result is the total elimination of certain types of debt owed by the individual. It’s almost like a fresh start financially, with the debtor’s obligations cleared. There are instances, however, when a debtor would still like to pay for certain debt. The bankruptcy discharge would not prevent him or her from volunteering to pay off a debt owed, as long as the individual enters into a reaffirmation agreement with the creditor.

What is a reaffirmation agreement?

A reaffirmation agreement is a document that the debtor and the creditor both enter into where the debtor reaffirms his or her intent to pay the debt, despite the bankruptcy discharge. For example, you bought a car, house, or smaller objects such as radiant heaters or kitchen appliances that you have not fully paid for during the bankruptcy proceeding. But you wish to continue paying for your balance even after you’ve been discharged from your debts. So you and the seller enter into a reaffirmation agreement to confirm that you will still be liable for that debt. ;

Often, the reaffirmation agreement will be in the interest of the creditor. He or she may request a reaffirmation agreement but cannot compel the debtor to enter into it as it is a voluntary contract. This then sparks the question of why the debtor would wish to enter into an agreement rebinding him into an obligation which he could be relieved of through a bankruptcy discharge.

Not entering a reaffirmation agreement puts the debtor at risk of his asset being taken back by the creditor due to the unfulfilled balance. So if he or she wishes to keep that secure asset, then a debtor would opt to enter into this form of contract with his or her creditor. With a reaffirmation agreement in place, the debtor would be able to keep the asset as long as the balance is continuously paid for until it is fulfilled.

Effects of entering into a reaffirmation agreement

Although a debtor will still be held liable for the debt subject to a reaffirmation agreement, there are some benefits to entering this deal with the creditor, such as a possible renegotiation of the terms of the agreement. The debtor can plead for a lower price for the asset, in exchange for continuing his payments.

In effect, the debt that is the subject of the reaffirmation agreement will be treated as if no bankruptcy has been filed. The debtor remains liable for the amount still owed to be paid according to the timings indicated in the contract and subject to any rights of the creditor in case of non-fulfillment.

When a reaffirmation agreement can be entered into

The law requires that a reaffirmation agreement must be entered into before the granting of a discharge in a bankruptcy case. The executed agreement may be filed by any party within 60 days after the first date set for the first meeting of creditors.

Should you enter a reaffirmation agreement?

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A lot of consideration must be made by the debtor before he or she enters into a reaffirmation agreement. Considering that his debts will be cleared by the bankruptcy discharge, it must be determined if binding oneself to be liable for debt will be worth it. Here are some questions to ask yourself before deciding to enter into a reaffirmation agreement:

  • Do you need to keep the asset that is the subject of the agreement?
  • Can you afford to satisfy the obligation you’re seeking to reaffirm?
  • Is the creditor able to negotiate a new deal with better terms?
  • Is the creditor able to take away the property if the reaffirmation agreement is not entered into?

A reaffirmation agreement, if entered into, will subject the debtor into certain financial consequences. So make sure you completely understand the procedure and what it entails in order to protect your interest.

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