Most residents of Washington file a bankruptcy petition to discharge debts that they have been unable to pay. Yet the bankruptcy code gives petitioners the right to voluntarily agree to pay a debt that would otherwise be discharged. Why would a person decide to exercise this option? The answers to this question may be surprising.
How does reaffirmation work?
Reaffirmations occur most frequently with regard to assets in which the creditor has a security interest. A security interest gives the debtor the right to repossess the asset if the debtor defaults. A bankruptcy discharge will not void the security agreement or affect the debtor’s obligation to pay off the underlying loan. The most common example of using a reaffirmation to retain possession of an asset after the court issues its order of discharge is retaining possession of the family car. Most individuals borrow money to purchase a motor vehicle, and they routinely give the lender a security interest in the vehicle. If the debtor wishes to retain possession of the automobile, he or she can negotiate a reaffirmation agreement with the creditor. If the parties agree on terms, the remaining purchase price due on the car will not be discharged; instead, the petitioner will agree to continue making payments in an amount agreeable to the creditor.
Making overdue payments
Generally, the debtor must bring the loan current before entering into a reaffirmation agreement. The number and size of the payments under the reaffirmation agreement are usually negotiated between the creditor and debtor, and no other debts are involved. If the secured asset is a house (the creditor’s security interest is represented by the mortgage) and if the payments are current, the debtor is not required to reaffirm the purchase money loan in order to retain possession of the house.
No debtor is required to enter into a reaffirmation agreement; such contracts are purely voluntary. However, the debtor must acknowledge in writing to the bankruptcy court that the meaning of the reaffirmation agreement is completely understood and that the debtor understands that he or she must make payments to the creditor as provided in the reaffirmation agreement.
Entering into a reaffirmation agreement
Entering into a reaffirmation agreement should not be done without serious consideration. In the best case, the debtor will be able to consult an experienced bankruptcy attorney about the consequences of signing such an agreement and the continuing obligation to make regular payments once the agreement is accepted by the court.