Chapter 7 Bankruptcy is the most common type of bankruptcy filing for consumers. It allows individuals, married couples, and even companies to eliminate (or “discharge”) most kinds of unsecured debt.
Secured debts such as home and auto loans work a bit differently, though. When filing for Chapter 7 Bankruptcy, debtors must present a Statement of Intentions regarding these secured debts. The statement indicates how each individual debt will be handled out of several possible options. The first option is to surrender the collateral on the debt in exchange for “full” payment status of the debt. Second, the debtor can redeem the collateral, allowing them to pay a lump-sum equivalent to the collateral. The third option is to “reaffirm” on secured debt. A reaffirmation agreement essentially restores the original relationship between debtor and lender.
How a Reaffirmation Agreement Works
If a debtor chooses to reaffirm a debt, this plan must be clearly articulated in the Statement of Intentions associated with their Chapter 7 filing. As part of the reaffirmation agreement, creditors of secured debt must present mandatory disclosures about the loan, including monthly payment, interest rate, balance, and description of collateral. Only the creditor has access to all the information required to present this aspect of the reaffirmation agreement. Once this information is collected and both parties–the creditor and debtor–have signed the reaffirmation agreement, most repayment arrangements are identical or similar to the original loan terms.
Reaffirmation Agreement: What is the Benefit?
While Bankruptcy Filings are intended to protect debtors, a reaffirmation agreement is designed to protect the creditor as it restores debtor liability. If default occurs in the future, the lender can repossess or foreclose on collateral in pursuit of settling debts.
So why should you consider a reaffirmation agreement? There are benefits to the debtor as well; a reaffirmation agreement requires lenders to report the timeliness of payments and loan status on the debtor’s credit report. If you’re able to to pay on your reaffirmation agreement as planned, this can lead to a faster recovery of your credit report. Without a reaffirmation, creditors are not required to report your payments to the crediting bureaus–even if you pay on time. Further, most lenders will not allow loan modifications on secured debt that has not been reaffirmeded. A reaffirmation agreement can provide the debtor the opportunity to adjust loan agreements and ease the repayment process.
If you would like to arrange a reaffirmation agreement with your creditors, contact bankruptcy attorney Anthony Deluca at (702) 252-4673 for a free consultation.