You can opt for bankruptcy when you are unable to pay your debts, and creditors are always calling you to clear the debts. Filing for bankruptcy allows individuals, couples, or even companies to eliminate the unsecured debts. In this case, your assets get liquidated to cover the secured obligations. However, sometimes you may be willing to retain a particular asset such as a vehicle or property. You can make your interest in retaining the asset by obtaining a reaffirmation agreement. The agreement indicates that you can maintain ownership of the particular collateral as long as you continue paying for it. Entering a reaffirmation agreement is a process that requires competent legal representation. At San Diego Bankruptcy Attorney, we offer consultation and guidance to all issues related to bankruptcy.

Overview of Reaffirmation Agreement

When the debts become too much to pay, and creditors are always calling, most individuals and companies opt for bankruptcy. This helps you get out of debt by breaking contracts between you and the creditors. There are two types of credit you can acquire:

  1. Secured. A secured debt is one that the lender asks for a valuable item, such as a vehicle or property, to act as collateral for the loan. The insurance acts as a guarantee that your creditors won’t get a loss if you fail to pay the mortgage. Also, it creates an ownership interest until you complete your payments.

  2. Unsecured. When a creditor doesn’t ask for any collateral when giving you a loan, the debt is considered unsecured. If you fail to pay such a debt, the lender cannot take or sell your property. Filing for chapter 7 bankruptcy allows you to be free of the liability for the unsecured debts.  

If you owe a loan that you had given collateral, the creditor will repossess and sell the property to cover the debt. Sometimes you may not be willing to lose the guarantee. Therefore, you have to keep the loan through the reaffirmation process. When you enter into a reaffirmation, you agree to owe the debt still to retain ownership of your property. In this case, you are required to keep making payments for the debt.

Getting into a reaffirmation agreement is always a complicated decision when filing for bankruptcy. Therefore, it is wise to discuss the matter with a knowledgeable bankruptcy attorney. Before deciding to reaffirm a debt, you should consider whether you can afford to continue making regular payments for the loan. Also, it is crucial to understand whether keeping the item would be financially beneficial for you.

If you decide it is in your best interest to reaffirm, you could negotiate a modification of terms. This could be in the form of interest reduction, which increases the length of payment or reduction of the total amount. When flinging for a chapter 7 bankruptcy, you may be trying to walk away from your debts, and reaffirmation may not be a good idea.

Reaffirmation Hearing

When you decide to reaffirm a debt, you enter a contract with your lender that makes you personally liable for the debt despite bankruptcy discharge. Most people reaffirm debts in an attempt to retain ownership of property that was used as collateral. In most cases, your reaffirmation will need a review from a bankruptcy judge to ensure your best interests. After receiving your agreement, you are expected to file it together with your bankruptcy. The court then schedules a hearing to discuss your reaffirmation.

Reaffirmation hearings are less formal as compared to those of bankruptcy. However, attending the hearing improves the chances of approval. At the hearing, the judge will discuss the details of the agreement and inform you of your best interests. Also, you may be asked several questions regarding your decision to enter the deal. Some of the concerns a judge may have include?

  • The value of your property according to your opinion

  • Whether or not you can afford to make loan payments if it gets eliminated from bankruptcy discharge

  • Your source of funds to pay for the loan 

  • Nature if your income and expenses after filing for bankruptcy

  • Whether or not you are current on all of your payments especially for the debt you are hoping to reaffirm

  • The judge will want to know whether you have ever missed a fee for your loan.

  • The court will make sure you understand that getting a reaffirmation means that you are personally liable for the particular debt. Also, you are expected to make payments for the same to retain collateral ownership.

It is not always a guarantee that your reaffirmation agreement will get approved in bankruptcy. If the judge thinks it doesn’t benefit you much, they can fail to agree. Some of the common reasons why the agreement is denied include:

  • You cannot afford to continue making payments for your debt as evidenced by your monthly budget

  • You are attempting to reaffirm an unsecured debt. When you file for bankruptcy, you are relieved of the liability to unsecured debts. The secured debts are the ones that may require reaffirmation to help you keep the property you used as collateral.

  • The reaffirmation agreement comes with increased interest rates. When entering a reaffirmation agreement with your creditors, there may be a change of loan terms. Some lenders increase the interest rates for your loans. If the judge thinks the rates are too high, they are likely not to approve the reaffirmation.

  • The amount of debts you are trying to reaffirm is more than the value of the property you want to retain. If the amount you will pay to maintain a property is more than it’s worth, the deal could cause you a loss. Also, you may fail to make the requirements compelling the creditor to repossess the property.

If your reaffirmation gets denied in bankruptcy court, all is not lost. You may still have an opportunity to keep your property if you followed all the guidelines of a reaffirmation agreement. Even when the judge does not provide a written order to allow the reaffirmation, most lenders will enable you to hold onto the collateral as long as you make regular payments for the debt. This is because the item you used as collateral may have depreciated in value and the creditor does not want to make a loss.            

Benefits of Entering a Reaffirmation Agreement

When you enter a reaffirmation agreement with your creditors, you will be doing it for a particular debt. However, it is essential to ensure that the decision to retain liability to debt is in your best interests. Some of the benefits you accrue from entering a reaffirmation agreement during bankruptcy include:

  1. Credit Recovery. Filing for bankruptcy often lowers your credit score. You are expected to continue making payments for the debts when you enter a reaffirmation agreement with your creditors. Your creditors will then report your adherence to the plan to the bureau. This can lead to a faster recovery of your credit score. If you fail to sign a reaffirmation agreement and continue to pay your debts, the lenders are not obliged to report your payments.

  2. Retaining ownership of the collateral. When you file for bankruptcy, your liability for the unsecured debts is eliminated. For the secured debts, the creditors may repossess the item used as collateral to pay for the debts. Most people enter a reaffirmation agreement to retain the property they used as collateral for a loan. However, it is crucial to understand that failure to adhere to reaffirmation payments could lead to property ownership loss.

  3. Increases chances of getting another loan. When you make your regular payments as per the affirmation agreement, your credit score may improve. Gradually, the positive effect of adhering to the deal could eliminate the adverse effects of bankruptcy on your credit score. With a better credit score, it is easy for creditors to trust you and offer a loan in the future.

  4. Loan Modification. When you decide to eliminate debt from the cover of bankruptcy, you will be liable for the debts and have to continue making payments. However, during the reaffirmation process, you can get your loan terms modified to make the necessary changes. Some of the modifications include the reduction of monthly installments or increased length of payments.

Even though reaffirming a debt can bring some numerous benefits, there are setbacks to entering the agreement. When you take up the liability for a debt, you have to make necessary payments. Defaulting on the payments may compel the creditor to take the property back. This makes you lose the amount you had paid before the default.

Canceling a Reaffirmation Agreement

When you file for bankruptcy, most of your debts are discharged. The reaffirmation agreement is a new contract that you make with your creditors, and you voluntarily choose to keep liability for the debt. A car loan and property mortgage debt are the most common debts that could compel a person to seek a reaffirmation. If, after agreeing, you are not able to make the payments, you can cancel the deal.

However, you have to meet the following conditions under the California Bankruptcy Code:

  • You can rescind your agreement within sixty days of filing the reaffirmation in court. When you present the reaffirmation motion in bankruptcy court, you will have up to sixty days to cancel if you don’t want to go through with it.

  • Any time before you receive a bankruptcy discharge. A reaffirmation agreement should get signed during the bankruptcy relief. If you’re going to file for reaffirmation after a bankruptcy discharge, you will be required to open your bankruptcy case so the reaffirmation can get included. Therefore cancellation of the reaffirmation agreement can be made any time before the discharge.

If you meet the above criteria, you should notify your creditors through writing. After the creditors send a return receipt, you can then file a notification of cancellation and other proof of service with the court. If you aren’t sure of your decision to get into a reaffirmation agreement, you should consult with a competent bankruptcy attorney to avoid regretting in the future.

Reaffirmation Agreement Frequently Asked Questions

Entering into a reaffirmation is not an easy process; you have to agree with your creditors that you will continue to pay your loans. Also, the bankruptcy court gets involved in the agreement. The following are some of the frequently asked questions about reaffirmation agreement during bankruptcy:

  1. How will eaffirming a Debt Affect my Credit Score? 

When you file for bankruptcy, your credit score is likely to be lowered, and the lenders may have reservations giving you credit in the future. A reaffirmation agreement removes the particular debt out of the bankruptcy proceedings. After signing the agreement, you are required to continue paying the loan. Your creditors will report all your payments to the credit bureaus. Reaffirming will help build a good credit score for you. Also, as long as you continue paying the loan on time, you can slowly build up the score to dilute the adverse effects of bankruptcy. Reaffirmation has some several negative effects, and it would be wise to consult your bankruptcy attorney before making any decisions.

  1. Can I Reaffirm a Debt After Bankruptcy Discharge?

Usually, filing Chapter 7 bankruptcy assures you discharge from debt liability. However, assets used as collateral for secured debts may get repossessed, but the creditors, if you want to retain asset ownership and continue to pay a particular loan. A reaffirmation agreement is a way to go. Reaffirmation agreements must be signed before you receive a bankruptcy discharge. This process often takes sixty days, after which your bankruptcy is finalized. If you want to enter the agreement after the release, you may have to file a motion to reopen your bankruptcy case.

  1. Does Reaffirming a Debt Ensure Permanent Ownership of Collateral?

When you reaffirm a debt during the bankruptcy proceeding, you eliminate it from a discharge. However, you are expected to make regular payments for the loan to maintain ownership. If you cannot continue making the payments, the creditor will repossess the collateral to pay for your debts. Therefore, getting into a reaffirmation agreement is not guaranteed to retain ownership of your property. With the help of a knowledgeable bankruptcy attorney, you can get your loan terms modified to ensure you can pay.

  1. Do I Have to Sign the Agreement?

No. Entering a reaffirmation agreement is voluntary. The process is advantageous to the creditor in that they get their debts paid. It can also help you keep ownership of the property or vehicles you may have used as collateral for the debts. However, no one will force you into signing the agreement. However, it is crucial to understand that your creditors have an automatic right to repossess the property if you are not current with the payment. Failure to enter the reaffirmation cannot be the reason for repossession. Before you get into an agreement with your creditors, it is crucial to consult with a competent bankruptcy attorney.  

  1. Can I Reaffirm a Debt in Chapter 13 Bankruptcy?

Chapter 13 bankruptcy, also known as the wage earners plan allows you to repay your debts by making a repayment plan with your creditors. However, you need to be earning a regular income to qualify for the discharge. Some debts cannot get discharged in chapter 7 or thirteen bankruptcy. The discharge will apply for debts that arose after the discharge if you want to obtain a reaffirmation agreement for chapter 13. Since you will already have a three-to-five-year plan to pay, you cannot make another agreement for a debt that is accounted for in chapter 13 bankruptcy.

  1. Can I Reaffirm Unsecured Debt in Chapter 7?

In most cases, a reaffirmation agreement is obtained for secured debts that could be repossessed by the creditors after a bankruptcy discharge. It is also possible to reaffirm an unsecured debt during the process of liquidation bankruptcy. However, you can only do this if you are a cosigner in debt with a parent, adult child, or spouse who isn’t declaring bankruptcy. When you reaffirm this debt, you will be permanently pulling it out of debt from bankruptcy protection.

Find a Bankruptcy Attorney Near Me

If you are hoping to retain some assets that you used as collateral for a debt, it would be wise to file a chapter bankruptcy. However, not all individuals will qualify for this type of discharge. By entering a reaffirmation agreement with your creditors, you can continue paying your debts and keep the property you used as collateral. In California, a reaffirmation agreement must get a review from a bankruptcy judge to ensure that it is in your best interests. Also, it should be clear that you are capable of continuing the payments. If you are hoping to keep ownership of your assets by obtaining a reaffirmation agreement, navigating the process with some legal representation would be wise. If you are in San Diego, CA, You will need experts from the San Diego Bankruptcy Attorney by your side. Contact us today at 619-488-6168 for more information.