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What is a reaffirmation agreement?

crisis in financial situationA reaffirmation agreement allows you to reaffirm debt that you owe prior to a bankruptcy. In essence, you make arrangements to continue paying your debt throughout the bankruptcy, as though you never filed. This debt is not a part of the bankruptcy discharge. In order to decide if a reaffirmation agreement is right for you, you need to learn how it works as well as the advantages and disadvantages.

When you enter a reaffirmation agreement, you agree to either maintain existing loan terms or to make payments based on revised terms. Either way, you have to keep making payments throughout your bankruptcy. Typically, your attorney negotiates the agreement for you, but you must decide whether to accept it. After both parties sign the agreement, a judge must agree to the reaffirmation as well.

Reaffirmation agreements allow you to keep property that would otherwise lose in a bankruptcy suit. This is especially important for Chapter 7 bankruptcies in which belongings are sold or repossessed to pay for debts. Accepting a reaffirmation agreement allows you to maintain possession of your car or house, even if you are currently behind on your payments.

If you are behind on your payments, restructuring your loan may be possible. Reaffirmation agreements allow your attorney to negotiate loan terms, such as your interest rate or the life of the loan. Many creditors would rather restructure your loan and gain most of their anticipated payment than receive little to no payment due to a bankruptcy filing. A creditor is under no obligation to accept a reaffirmation agreement, however.

Remain cautious about a reaffirmation agreement, as it holds you responsible for a debt. By signing a reaffirmation agreement, you agree to continue to make payments and to do so on time. Debt in a reaffirmation agreement is not dischargeable through the bankruptcy process. Default on reaffirmed debt leads to repossession or foreclosure. You might even pay this debt long after the rest of your debts discharge through bankruptcy.

A judge must accept your reaffirmation in context of your bankruptcy and financial constraints. If the judge does not believe you have the resources to fulfill your obligation, the judge dismisses the agreement. Create emotional distance between the debt and your ability to pay back the debt to help you decide whether or not to enter a reaffirmation agreement.

Consider carefully if a reaffirmation agreement is constructive toward your financial interests. A car that is ill financed might be better left to bankruptcy; however, only your attorney can steer you in the correct direction.