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Reaffirmation Agreements in Chapter 7 Bankruptcy

The biggest difference between Chapter 7 and Chapter 13 bankruptcy is the ability to keep property that is subject to a lien, such as a home or car. In Chapter 13 bankruptcy, this property can usually be retained subject to a repayment plan if the debtor has a high enough qualifying income. In Chapter 7 bankruptcy, it’s generally understood that the debtor must give up his or her property in exchange for a total discharge of debt. This isn’t entirely accurate, however. In many cases, lenders will be willing to work with you under a reaffirmation agreement.

What is a Reaffirmation Agreement?

A reaffirmation agreement is a voluntary agreement between the debtor and creditor to make payments on a debt that would otherwise be discharged in the Chapter 7 bankruptcy proceedings. If the debt is otherwise dischargeable, you do not have to pursue the agreement with the creditor. Similarly, lenders are under no obligation to accept reaffirmation agreements, in any many cases have policies not to do so. However, if the parties can come to terms on the reaffirmation agreement, it must be made and entered before the court before the entry of discharge is filed.

If a debtor changes their mind and chooses to rescind a reaffirmation agreement, he or she may do so any time before the entry of discharge, or within 60 days of filing the reaffirmation agreement with the court, whichever is later.

If the debtor is unable to meet his or her obligations following bankruptcy, the debt remains on the debtor’s record and the creditor may take legal action to collect it. Because of this, it’s important to make sure you have a plan to repay any debts you want to reaffirm in bankruptcy.

Why Choose a Reaffirmation Agreement?

Obviously, the reason most debtors seek Chapter 7 bankruptcy is to discharge their debts and rebuild their lives with as little debt as possible. However, there are several reasons to consider pursuing reaffirmation agreements on certain debts.

First, reaffirming a debt will help you rebuild your credit more quickly as the loan will remain on your credit report and the lender will continue to report timely payments. This can make it easier to obtain loans on more favorable terms in the years following a bankruptcy discharge.

Second, a reaffirmation agreement may result in better terms on the property you are seeking to retain. A reaffirmation agreement is an entirely new contract on the loan. Rather go through the costly steps of repossessing property, in many instances lenders will agree to lower the principal or interest rates to ensure they still make some of their money back off of the loan.

Finally, without a reaffirmation agreement in place, some lenders will still repossess your property even if you continue to make payments on it. The reaffirmation agreement can be an important protection against this possibility.

It is important to note that if you reaffirm a debt but then fail to make payments on it resulting in repossession, the lender may then sue you for the deficiency in reselling the repossessed property, so simple repossession isn’t the only risk of reaffirmation. This means that if you owe $10,000 on a car and after repossession the lender is only able to resell it for $7,000, the lender can sue you for the difference of $3,000. So if you are significantly under water on a debt, a reaffirmation agreement is not always the best choice in bankruptcy.

How to Obtain a Reaffirmation Agreement in Chapter 7 Bankruptcy Proceedings

Any reaffirmation agreement that is not secured by real estate or between a debtor and a credit union must be in writing and approved by the court. This written agreement is called a Form 240A Reaffirmation Agreement. The agreement must state the property subject to the agreement, its value, and the reason for reaffirmation. Both the debtor and the lender must review and sign this agreement. However, ultimately the bankruptcy judge will determine whether it is in the best interest of the debtor to reaffirm the debt.

Reaffirmation Agreements in Chapter 7 Bankruptcy

If you are considering filing bankruptcy but want to ensure you retain some of your property during the proceedings, an experienced bankruptcy attorney can help. The Law Offices of Melanie Tavare of Hayward and Oakland can assist you in reducing or eliminating debt through Chapter 7 or Chapter 13 bankruptcy. Contact the Law Offices of Melanie Tavare at 510-255-4636 or online.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.


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