Many people are facing less-than-ideal financial situations. If you’re one of them, you probably feel like you’re in an endless cycle of paying back your debt and then borrowing again. It seems impossible to catch up, especially when you’re living from paycheck to paycheck. Or worst still, not having a paycheck.
With your credit card debt, real estate mortgage loan, and car loan piling up, you’re barely able to make ends meet. This may lead to late, missed, or default on payments, which may result in the loss of your home, car, or any collateral that you used to secure the debt. If you can no longer afford your living expenses, much less pay what you owe, you have the option to file for bankruptcy so that you can get debt relief. This is when reaffirmation comes into the picture.
Does reaffirming your debt help your credit? Yes. It can help you keep your possessions and rebuild your credit. More on that below.
- How can reaffirmation help me during my bankruptcy proceedings?
- Will a reaffirmation agreement help me with my debt?
- How will it affect my credit?
These are only a few of the questions that you may have at this point. Let us help you answer them in this post.
What Does Reaffirmation Mean?
When you reaffirm your debt, you enter into an agreement with your lender that you’ll pay all of your debt even as you file for bankruptcy. Since you reaffirm your debt, you’re letting go of the benefit you’ll get from a bankruptcy discharge, which involves no longer having to pay for discharged debts.
Keep in mind that this is a legal obligation, and if you fail to keep up with your reaffirmed debt, your pay may be garnished or the asset used as collateral taken by the lender.
How Does Reaffirmation Relate To Chapter 7 Bankruptcy?
If you’re deep in debt, you have the option to file for Chapter 7 bankruptcy. Chapter 7 bankruptcy gives you debt relief, which means no more debt collection, wage garnishment, home foreclosure, or repossession of property or assets used as collateral.
However, the court will appoint a bankruptcy trustee who will sell your non-exempt properties. The sale proceeds will then be used to pay a part or all of your debts. But if you wish to keep the property that was used to secure the debt, you can enter into a reaffirmation agreement.
You’ll enter a legally binding contract that says you still owe the debt even after your Chapter 7 bankruptcy case ends. By doing so, the asset won’t be sold by the trustee or seized by the creditor.
Why Do You Need To Reaffirm Your Debt?
Bankruptcy eliminates your liability to pay a discharged loan but the lien remains. So, lenders have a legal right to repossess the assets used to secure a debt. If you cannot afford to lose that asset, you should consider going into a reaffirmation deal with your lender.
Before The Bankruptcy Abuse Prevention and Consumer Protection Act was passed in April 2005, debtors may continue to pay the secured loan after bankruptcy to avoid default. But the new provision changed the rules. Filing for bankruptcy puts you in default even if you are current on your loan payments.
A reaffirmation agreement helps protect your property from repossession provided that you make timely payments.
When Do You Need To File A Bankruptcy Reaffirmation Agreement?
If you’ve decided to reaffirm your debt, you or your creditor need to file the reaffirmation agreement form before a discharge is granted during the bankruptcy proceeding. You have to do this within 60 days after the creditor’s first meeting in the bankruptcy case for it to be valid and legally binding.
Always remember that reaffirming any debt is optional. No law requires you to do so. Therefore, creditors cannot force you to sign this agreement.
You should only enter a reaffirmation contract if:
- It’s in your best interest
- It’s the only way to keep the collateral
- You’re sure that you can pay off the debt
Are You Required to Sign a Reaffirmation Agreement?
Getting into a reaffirmation agreement is voluntary. You, the debtor, are the only one who can file the reaffirmation, which means lenders can’t pressure you to sign one. Just remember that if there is no reaffirmation paper signed, then you may lose the assets and get lower credit scores. If you decide to file one, you have to follow through and pay your dues according to the terms of the agreement.
What Are The Benefits Of Reaffirming Your Debt?
Now, you’re probably wondering why you should reaffirm your secured debt. Here are the benefits of signing this new agreement:
- Credit repair – Filing for bankruptcy means you’re no longer liable to pay the loans that have been discharged. You may get relief from your debt, but that will have a devastating effect on your credit record. All bankruptcy-related information will remain on your credit report for 7 to 10 years. The payments you make for your home or car loan after the bankruptcy will no longer be reported to the credit reporting bureaus. On the one hand, the reaffirmation of your mortgage or your car loan means all the payments you make will continue to be reported to these agencies, which will help in repairing your credit.
- Get new loan terms – Since this is a new agreement with your lender, you may be able to negotiate for better loan terms. Lenders want borrowers to pay back their loans, so they may agree to give you more favorable terms to get the money owed.
- Avoid repossession – The reaffirmation is a legal agreement, which means lenders cannot repossess the collateral as long as you pay the loan back. The same cannot be said if the debt was not reaffirmed. Lenders may take the assets you used as security when you filed for bankruptcy.1.
What Are The Disadvantages Of Reaffirming Your Debt?
- You won’t get relief from the discharged debts after bankruptcy.
- You have to pay the amount owed even if the asset was damaged or destroyed.
- Lenders can sue you if you default on your reaffirmed debt.
Can You Reaffirm Your Debts After Discharge In Bankruptcy Case?
Unfortunately, you can no longer file a reaffirmation agreement after a discharge order has been issued for your bankruptcy case. Even if after the bankruptcy judge closes your case, you still can’t reaffirm your debts. That’s why you have to consider if a reaffirmation agreement is your best option before the discharge date. Assess your situation and talk to a bankruptcy attorney for recommendations.
What Are The Requirements For A Reaffirmation Agreement?
- You have to file a reaffirmation agreement before a discharge is given on the debt.
- Both parties, debtor and creditor, must voluntarily enter the agreement.
- It’s better if both parties are represented by a lawyer to avoid possible problems in the future.
- The debtor must be given the option to cancel the agreement within 60 days after filing.
Can You Cancel Reaffirmation Agreements?
Yes, you can cancel the reaffirmation agreement but within a limited timeframe. You can only rescind it within 60 days after the agreement was filed with the bankruptcy court or before a discharge is issued in your bankruptcy, whichever date is later.
You need to inform the lender involved, in writing, and file a notification with the court that you rescinded the agreement for it to be added to your record. It’s best to talk to your lawyer first before you cancel a reaffirmation agreement.
You will need the following information to cancel the reaffirmation agreement:
- Date of when the reaffirmation agreement was filed with the court
- Name and address of the lender
- The date that a discharge was issued, if any
Here are the steps you need to take to cancel the reaffirmation agreement:
Write a reaffirmation rescission letter and make one (1) copy.
- Send the original copy to the creditor via certified mail and keep the remaining copy for your records.
- Keep a copy of the green return receipt postcard, which confirms that the lender received your mail containing the reaffirmation rescission letter.
- Submit the Notice of Rescission of Reaffirmation Agreement, as well as a copy of the Reaffirmation Rescission Letter, green return receipt postcard, and certified mail receipt, to the court where you filed your bankruptcy.
What If You Or The Lender Violate The Reaffirmation Agreement?
You’ll violate the reaffirmation agreement if you fail to repay the reaffirmed debt. When that happens, the lender will repossess your property. If the debt is still not fully covered, the lender may sue you to recover the remaining debt.
Lenders would violate the agreement by taking certain actions that aren’t covered in the agreement, such as repossessing your property even if you’re making timely payments. Additionally, you can sue the creditor if they committed a fraudulent act or misrepresentation to get you to agree to the reaffirmation.
Who Can Help Reaffirm Your Debts?
You may or may not be represented by a bankruptcy attorney when entering a reaffirmation agreement. However, the reaffirmation process involved between the two is different.
If you have an attorney, everything will be put into writing. Your attorney will certify in writing that you were informed of the consequences of reaffirming a debt, you voluntarily entered the agreement, and that the reaffirmation will not cause you or your dependents undue financial hardship.
If you don’t have legal representation, you’ll have to appear before a judge and explain why you want to enter into a reaffirmation agreement. You also have to explain how you plan to pay off the debt after the bankruptcy case. The judge needs to determine that the reaffirmation agreement is in your best interest and won’t cause undue hardship.
What Does Reaffirmation Of Debt Mean On A Credit Report?
When you file for bankruptcy, all the accounts included and discharged will remain in your credit report for seven years. This will pull your credit score down, which will significantly affect your financial decisions down the road. Even if you pay some of your loans, the repayments won’t appear on your credit report.
Reaffirmation can help you rebuild your credit after your bankruptcy. Once you reaffirm a debt, like car loans or a mortgage, it will no longer be part of the bankruptcy-related information in your credit report.
If you manage to pay off the loan under the reaffirmation agreement in full, the positive account will remain on your credit report for 10 years. Likewise, making timely payments on your reaffirmed debt will help rebuild your credit.
Conclusion
There’s no magic trick or easy way to rebuild credit after bankruptcy. It will take time, patience, and commitment to once again have a good credit standing. Although reaffirming a debt can help improve your credit, it’s a decision that you should not take lightly. If you have questions or doubts, it’s better to seek legal advice first.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
