If you file Chapter 7 bankruptcy, it’s usually because you want to discharge, or erase, your debt. This means that you would no longer be obligated to make payments to discharged creditors. However, some debts are secured and tied to collateral, like a car, home, furniture, etc. When it comes to secured debts, debtors have three choices:

  • Surrender the collateral and wipe out the entire balance owed to the creditor.
  • Keep the collateral continue to make the normal monthly payment creditor. This is known as “reaffirming” the debt.
  • Propose to pay the creditor the fair market value of the collateral in one lump-sum payment. This is known as “redeeming” the collateral.

While a debtor can end up paying far less for the collateral by redeeming it, for most, it is impossible to raise the entire lump-sum amount needed to redeem within the 30-day period. If a debtor cannot borrow the lump sum from his retirement plan or from friends or family, redemption is not a practical solution.

So, for most Chapter 7 debtors, the best option to keep collateral is to reaffirm the debt. Talk to one of our skilled attorneys to learn more about reaffirmation agreements in Salt Lake City Chapter 7 bankruptcy.

How Does Your Creditor Know You Want to Reaffirm?

One of the many documents filed with the Bankruptcy Court in a Chapter 7 case is the Statement of Intentions. This document expresses how the debtor intends to deal with the secured creditors. The debtor list each secured creditor, the collateral securing the loan and whether the collateral will be surrendered, redeemed or whether the debt will be reaffirmed.

The secured creditors will review the Statement of Intentions and will prepare accordingly. If the debtor is going to surrender, the creditor will contact the debtor’s Salt Lake City attorney to make arrangements to pick up the collateral, and if the debtor indicates reaffirmation, the creditor will email the appropriate reaffirmation agreement to the debtor’s attorney.

What is a Reaffirmation Agreement?

A reaffirmation agreement lets debtors continue paying for items purchased with secured debt that they wish to keep—even if they file bankruptcy. While these debts might be dischargeable, bankruptcy does not sever the creditor’s rights to the collateral. Executing a reaffirmation agreement allows the debtor to keep possession of the property, but it also obligates the debtor to continue making all payments on that specific debt.

Reaffirmation agreements are voluntary. The court or a creditor can’t force you to enter into these agreements, but there are many reasons to reaffirm a debt instead of discharging it. In addition to keeping property, a debtor may wish to reaffirm a secured debt if a co-signer has not filed bankruptcy. Reaffirming debt can protect a co-signer from negative credit reporting. Since a discharge only affects the filing party, co-signers still owe the full amount after discharge. Circumstances like these may push a person toward reaffirming a debt.

The Risk of Reaffirmation

Reaffirming a debt makes sense for many people, but this process has several risks. If a debtor reaffirms a debt, he gives up his right to discharge it, meaning that the creditor can pursue the debtor if he is unable to make future payments.

In most cases,  the debtor focus resources on making payments on secured debts after discharging other obligations like medical bills or credit cards. It is important to understand, however, that reaffirming a debt could result in future financial strain. If the debtor fails to make future payments, repossession is an option that creditors have, and the debtor can be liable for any remaining balance after the creditor sells the collateral.

While these risks are real, reaffirmation agreements are common and often beneficial in Salt Lake City Chapter 7 bankruptcy cases. Debtors who obtain a fresh financial start through bankruptcy are often able to make these payments fit within their budget after discharge.

Talk to a Salt Lake City Attorney About Reaffirmation Agreements in Chapter 7 Bankruptcy

If you are considering a reaffirmation agreement in your Chapter 7 bankruptcy, consult with a Salt Lake City attorney. Reaffirming your debt can help you keep your home or vehicle, but it also comes with some risks, and an experienced legal professional can help you weigh your options. To learn more, call to schedule a confidential consultation as soon as possible.

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