Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, is the legal process of an individual or business eliminating debts by discharging and liquidating assets to pay back debt. However, certain property may be important to the debtor, and they may wish to retain ownership. This can be done through a reaffirmation agreement. If you are filing for bankruptcy, understanding all of your legal rights and options is crucial, especially when it comes to ways you can protect yourself and your family. To learn more and secure skilled representation, reach out to a Bergen County Chapter 7 bankruptcy lawyer and schedule your free consultation today.
What is a Reaffirmation Agreement in Bankruptcy?
A reaffirmation agreement is a contract that is used during Chapter 7 bankruptcy proceedings. It allows a debtor to keep a debt in exchange for their agreement to continue repaying the debt to the creditor.
During Chapter 7 bankruptcy, most unsecured debts are eliminated and sold to pay back creditors and give the debtor a fresh start. However, the debtor may want to maintain certain assets like their car or home. If the debtor wants to keep an asset that would possibly be repossessed, they can attempt to reaffirm the debt.
Through the reaffirmation agreement, the creditor agrees that as long as payments are continuously made toward the debt, they will not repossess or take back the asset.
Why Would a Reaffirmation Agreement be Necessary?
The main purpose of a reaffirmation agreement is to allow debtors to retain ownership of important assets. Being able to keep certain assets and property can be important for individuals and their families, especially if the asset is important for daily life and the debtor can afford to make payments toward the debt.
A reaffirmation agreement can also be beneficial to the debtor’s credit. Because they will continue making payments on the loan, it will help rebuild their credit more quickly than if they were to forfeit the asset.
What Are the Risks?
While a reaffirmation agreement can be beneficial to the debtor, it does not come without risks. By reaffirming a debt, the debtor is giving up the chance of eliminating it, meaning they will remain personally responsible for payment. If eventually they stop making payments, the creditor can pursue repossession, foreclosure, or other collection actions. The debt will not be protected through bankruptcy.
Before deciding to enter a reaffirmation agreement, it is important to be honest with yourself and consider all relevant factors. Ask yourself whether you can realistically keep up with the required payments, if the asset is worth keeping given its condition and value, and whether it makes more sense to forfeit the asset and find an alternative option.
Entering a reaffirmation agreement is a big decision, so it is important to obtain legal counsel before making any decisions. Reach out to a skilled attorney today for more information and advice.