For most residents of southeastern Florida, the decision to file a petition for relief under Chapter 7 of the United States Bankruptcy Code is an attempt to cancel as much of their financial obligations as possible. Still, a valuable section of the code is the provision that allows a debtor to renegotiate the terms of a loan agreement with a creditor and to reaffirm the debt.
Why would a person who is heavily in debt agree to such an agreement?
A reaffirmation agreement is a contract between the debtor and one or more creditors in which the terms of the underlying loan or credit agreement are modified.
For example, a debtor may want to reaffirm a debt that was used to purchase an automobile. If the debtor needs the automobile for business, say, as a traveling salesperson, they may be able to keep the car after reaffirming the credit agreement with the bank that made the original loan.
In return, the debtor agrees to terms that include continued payments on the debt and an agreement to allow the creditor to repossess the collateral if the debtor again defaults.
Obtaining a reaffirmation agreement
An application for a reaffirmation agreement must be made within 60 days after the first meeting of creditors. Usually, the debtor relies on a bankruptcy attorney to draft the reaffirmation agreement, which identifies the debt and the collateral and proposes the terms of continuing payment.
The debtor then submits a statement of intent to the court and provides a copy to the creditor. The court may decide to hold a hearing in which the debtor must state the reasons for wanting the reaffirmation agreement and describe his ability to comply with the revised loan obligation. If the court approves the reaffirmation agreement, both parties sign it and it replaces the original loan agreement.
A reaffirmation will allow the debtor to keep the asset that is the collateral for the original loan. Also, the reaffirmation agreement may mitigate any damage to person’s credit score resulting from the bankruptcy. No one should sign a reaffirmation agreement without consulting an experienced bankruptcy lawyer.