Bankruptcy Attorneys Wink & Wink Can Help You Avoid This Costly Mistake
Chapter 7 bankruptcy wipes out your personal liability on all secured debt, such as auto loans, credit card debt, medical bills, and mortgages. For people overwhelmed by crippling debt, Chapter 7 bankruptcy can mean a fresh start.
Normally, after your debts are discharged in Chapter 7, you are no longer personally liable for secured debts. This means that if you are unable to keep up with those payments in the future because of continued unemployment, job loss, reduction in income, illness, damage to the property itself (such as a car or home that suddenly need expensive repairs), or any other reason, the creditor can only collect the debt by taking the property back, either through repossession or foreclosure. The creditor cannot sue you to recover any financial deficiency left over after they take back and resell the property.
However, things can get complicated and often not be in your best interest if you agree to a reaffirmation agreement.
What Is a Reaffirmation Agreement?
Reaffirmation agreements are a special feature of Chapter 7 bankruptcy. They give your creditors a chance to get you back on the hook for debt you would have otherwise discharged in the bankruptcy by allowing you to reaffirm, or re-sign, liability for a specific debt. Because of this, reaffirmation agreements should be avoided, unless there is a very good reason to enter into one.
Reaffirmation agreements are entirely voluntary. No creditor can make you reaffirm a debt. This is because a reaffirmation goes against the most basic upside of filing bankruptcy: the fresh start.
You cannot be sent to collections, sued, or garnished on a debt that was discharged in bankruptcy. If you reaffirm a debt, however, and something goes wrong and you cannot keep up with the payments, you no longer have that protection—you can now be sued or garnished. And you cannot file Chapter 7 bankruptcy again for eight years, so you have no legal protection against those actions.
If you’re considering filing for bankruptcy to get debt relief, it’s crucial you speak with a skilled and trusted debt settlement attorney, such as Denver-based Wink & Wink. They’ll review your case and help you make the right choices to avoid costly mistakes.
Are There Any Times a Reaffirmation Agreement Is a Good Choice?
There may be a few situations in which a reaffirmation agreement makes sense for you.
1) The Creditor Gives You a Better Deal
One reason to sign a reaffirmation agreement would be because the creditor agrees to sweeten the pot and make it worthwhile for you to re-up on the secured debt. This could be done through a reduced interest rate or a reduction in the principal balance owed. Unfortunately, this is a very unlikely scenario.
2) The Debt Includes a Cosigner
If you took out the debt with a cosigner who will continue to remain liable on the loan, such as a spouse or parent, you may not want to leave them hanging after your bankruptcy. In this case, your moral obligation to your cosigner (i.e., you don’t want to harm or ruin that relationship) may outweigh the benefits of bankruptcy, and you may decide to reaffirm the debt. However, you should know that there is no law against paying a discharged debt. So you do not have to reaffirm the debt to repay it, or repay your friend for it.
3) You Want the Debt Payment Reported to the Credit Bureaus After Bankruptcy
One of the big reasons a creditor will give you to try to get you back on the hook for debt after bankruptcy is credit reporting. If you do not reaffirm secured debt after bankruptcy, the creditor does not have to report your continued, on-time payments to the credit agencies, and these payments will not help improve your credit score after bankruptcy.
On the surface, this may seem like a good reason to reaffirm a debt. However, there are other ways to build credit after bankruptcy, such as on-time payments to student loans, responsible use of secured and unsecured credit cards which you can obtain after bankruptcy, and payment on future secured debt (such as new auto loans). The bottom line is that your credit will improve after bankruptcy as long as you pay any future debt on time and do not use more than 30% of any one unsecured credit line at any time.
Research shows that the majority of people who file bankruptcy regain their original, good credit score within 24 months of filing.
You will get offered credit again. Reaffirming a debt for which you would have come out from bankruptcy free and clear of is not a benefit to be given up solely for the prospect of being extended more credit in the future.
4) Your Creditor Is Going to Repossess Your Collateral
The last situation that might make you consider reaffirming a debt after bankruptcy would be if the creditor threatens to repossess your car or personal property if you do not sign a reaffirmation agreement. This is because the creditor will consider your bankruptcy filing a breach of contract and repossess based on that fact alone.
This typically only happens with cars. Mortgage lenders cannot foreclose on your home for failure to reaffirm the mortgage. And very few auto creditors will threaten to repossess cars without a reaffirmation agreement. Your bankruptcy lawyer will know who these creditors are and whether this is a risk you even need to worry about. Most likely it is not.
If you are unlucky enough to have a creditor holding your auto loan, then you still have to analyze whether it makes sense to sign a reaffirmation agreement. You probably still do not want to reaffirm debt on a depreciating asset like a car and then be liable for that debt even if it breaks down or you find you can’t keep up with the payments. However, in some limited circumstances (like for a vehicle in which you have equity), it might make sense.
The Procedure for a Reaffirmation Agreement
In order to be approved, a reaffirmation agreement must be reviewed by the Bankruptcy Court, and if you are represented by an attorney for the purposes of the reaffirmation, your attorney must certify that the agreement does not impose an “undue hardship” on you or your dependents. A reaffirmation agreement is presumed to impose an “undue hardship” if your monthly income minus your monthly expenses does not leave room for the payment of the debt being reaffirmed.
A reaffirmation agreement must be signed within 60 days of your original meeting of creditors, unless the Bankruptcy Court, in its discretion, allows for a longer time frame. After signing a reaffirmation, you still have 60 days to back out of it.
If you’re going through bankruptcy and considering a reaffirmation agreement, consult with an experienced Colorado bankruptcy law firm, such as Wink & Wink, to ensure you’re making the right decision.
Is a Reaffirmation Agreement Right For You?
Reaffirmation agreements are loved by creditors who want to get paid and hated by bankruptcy attorneys who want their clients to get a true fresh start. Many creditors will misrepresent the nature of a reaffirmation agreement as a way to make you think it is necessary or somehow to your benefit. However, in the vast majority of cases, signing a reaffirmation is a terrible mistake.