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What you should know about debt reaffirmation

On Behalf of | Dec 18, 2019 | Bankruptcy Basics, Chapter 7 Bankruptcy

Filing for bankruptcy is not an easy decision. If you struggle to stay afloat in a sea of medical expenses, mortgage payments and credit card debt, you are not alone. By the end of a 12-month period ending June 2019, 773,361 people in the United States filed for bankruptcy, according to the U.S. Courts. Approximately 479,043 of those cases were Chapter 7 bankruptcy. 

During a Chapter 7 bankruptcy, otherwise referred to as liquidation bankruptcy, the trustee over the case is responsible for selling non-exempt property. By doing so, the trustee maximizes the return to repay creditors in the case. While liquidation may help to relieve you of some of your financial burdens, there may be some property that you do not wish to liquidate. 

Defining debt reaffirmation? 

If you wish to keep property during bankruptcy and after the discharge, you may want to reaffirm the loan with the lender. Debt reaffirmation may be a potential route of action when the loan has collateral, such as an automobile loan. Rather than write off the entire debt in bankruptcy, the lender may be willing to let you reaffirm the debt by signing another loan agreement. 

This route is often beneficial for the bank, as it is better to resign the contract than lose all the money through bankruptcy. As a result, some lenders will create better terms for the remainder of the loan by lowering the interest rate and/or decreasing the monthly payments. 

Things to keep in mind 

Once you reaffirm the debt, you must pay off the remainder of the loan. Keep in mind the following: 

  • If you fail to make a payment on the loan, the lender can take the property. 
  • Debt reaffirmation cannot cause you undue hardship. 
  • You cannot claim bankruptcy again for eight years and cannot get rid of the loan payments upon reaffirmation of the debt. 
  • You must sign the reaffirmation agreement and submit it before the bankruptcy discharge. 

If you decide to reaffirm your debt with the bank, be sure to keep current on your payments and stay on good terms with the creditor.