Reaffirmation Agreements: When You Don’t Want to Discharge a Debt
The point of bankruptcy is to discharge debt and give the debtor a fresh start. Most debtors who file bankruptcy want to eliminate debt, start over, and perhaps use whatever income they have to pay their normal living expenses, instead of paying debt. But what happens when a debtor wants to pay off a debt?
When You Want to Keep Debt
There are times when someone who files for bankruptcy may not want for a debt to be discharged. This usually happens with secured items like a car or a home.
Take a car, for example. If the debt—the car loan—is discharged, the vehicle normally would have to be surrendered back to the creditor. But most people need their cars—they would rather keep paying their car loan and not have to surrender their car. The same logic often applies to a home, especially if the mortgage payments are current and not in default.
To keep necessary secured property, the bankruptcy laws do allow a debtor to do what is known as reaffirming a debt. Reaffirming a debt is the debtor’s promise to pay back the debt, even after the discharge. The debtor is agreeing that a particular debt is not included in, and thus won’t be discharged in the bankruptcy. In return, the debtor will get to keep the secured property.
Of course, this is a risk—if the debtor at some point after the bankruptcy cannot pay the debt, they are stuck with the debt. If the debt secures property such as a home or a car, the items can be foreclosed on or repossessed if the debt is not paid.
If you opt to reaffirm a debt, you will not be able to change your mind afterward. This is why debtors should be very careful and consider whether to reaffirm any type of debt.
When to Reaffirm
As an initial consideration, only debts that secure property that the debtor absolutely needs should be reaffirmed.
Luxury items, or investment property, or debt on multiple cars, generally should not be reaffirmed. Remember also that instead of reaffirming something like a car loan, you may be better off giving up the car (or other secured items) that you paid too much for, and then buying another, cheaper car after your bankruptcy discharge.
A good bankruptcy attorney can also determine whether or not secured property is actually secured. Many creditors (particularly some retailers) think they have liens on property that you own, when in fact they do not. If they do not, there is no need to reaffirm those debts in order to keep the property.
Getting Court Approval
A court has the final discretion on whether to allow you to reaffirm a debt or not. Unless the debt creates a significant financial burden for you, or it is clear you cannot afford the debt, the court will usually approve of the reaffirmation.