What Happens in a Bankruptcy?
A bankruptcy is supposed to protect you by discharging most of your debts because you are no longer capable of making your payments. However, it is important to remember that a bankruptcy is supposed to protect your creditors as well. For example, your creditors can still sell your property to recoup some of their losses if they have a lien on it, which is where a reaffirmation agreement can help.
How Does a Reaffirmation Agreement Change a Bankruptcy?
To sum it up, a reaffirmation agreement is an agreement between you and your creditor that you will continue making your payments on one of your secured debts instead of letting your bankruptcy discharge it. In effect, this means that it will be as though your bankruptcy never happened when it comes to that particular debt as well as its collateral.
As a result, neither you nor your creditor can be forced into a reaffirmation agreement, meaning that there is some room for negotiation. For example, if you still owe $20,000 on your car, you might be able to negotiate that down to a smaller sum because your creditor can recover more by making your outstanding debt manageable for you than by taking your car for the purpose of resale.
What Are the Limitations?
However, it is important to note that a reaffirmation agreement is subject to the approval of the bankruptcy court,
which can order a hearing if you fail to meet four conditions. First, the reaffirmation agreement needs to be voluntary. Second, bankruptcy proceedings need to be ongoing. Third, your reaffirmation agreement needs to be signed by your attorney, serving as proof that they have explained the potential consequences of your choice to you. Fourth, you need to show that the debt will not be an undue hardship, meaning that the sum of your payments as well as the rest of your expenses will not exceed your revenues. If you fail to meet even one of these conditions, the bankruptcy court will order a hearing where you will have the chance to either convince the judge that you can make your payments or have your reaffirmation agreement rejected.
Since undue hardship is one of the two most common reasons for a hearing about a reaffirmation agreement along with the lack of attorney representation, you are going to need to come up with a persuasive argument showing that you can make your payments even though you have previously shown your inability to make your payments. For example, if you have managed to convince someone to help you with your payments, that could be used as evidence that your debt will not be as much of a hardship as it seems. Similarly, if you have managed to negotiate better terms such as a reduced balance or a lower interest rate, you need to point these out as well.
Should You Use An Agreement?
In the end, you are the one who will be deciding whether you want a reaffirmation agreement or not, though it is important to note that it is not recommended in most cases. After all, a bankruptcy is a chance to start anew, which can be complicated by the presence of a debt that you have previously defaulted upon.
Regardless, the upside of a reaffirmation agreement is that you get to keep a piece of your property instead of seeing it being sold to cover your outstanding debt. However, you need to know that you will be stuck with the debt for a long, long time to come, not least because you have to wait 8 years before you can declare bankruptcy again. As a result, you shouldn’t agree to a reaffirmation agreement unless it is something that you absolutely need and you are absolutely sure that you can afford.