What Is A Reaffirmation Agreement? And Why Do I Need One?

Is Reaffirmation Right for You? Weigh Your Options.

Going through bankruptcy can be confusing, especially when you have to make decisions about your finances. One important decision is whether or not to sign a reaffirmation agreement. So, what is a reaffirmation agreement in Michigan? This agreement is a legal promise that you will continue paying off certain debts, like a car loan or mortgage, even after you’ve filed for bankruptcy.

But why would you want to do this? In this discussion, we’ll explain what a reaffirmation agreement is, how it works, and why you might need one. By understanding this, you can make better choices about your money during and after bankruptcy.

Short Summary

• A reaffirmation agreement is a voluntary contract between a Chapter 7 debtor and a creditor to keep a debt from being discharged in bankruptcy. The debtor agrees to continue repaying the debt, and in return, the creditor agrees not to repossess the property, such as a car or house, as long as payments are made. This agreement is often used to retain important assets that might otherwise be lost.

• Reaffirming a debt can be beneficial if you want to keep essential property like a car or home. It may also help in rebuilding your credit score over time if you can afford to continue payments. However, reaffirmation is usually not advisable unless you are certain you can meet the payment terms, as it does not make sense to reaffirm a debt if you can’t manage it financially.

• To reaffirm a debt, start by declaring your intention through the Statement of Intentions (Form 108) filed with your bankruptcy forms. Draft a reaffirmation agreement with the creditor, complete and file Form 27 and Form 240A, and obtain court approval. A hearing before a bankruptcy judge will finalize the decision, with the court possibly rejecting the agreement if it presents undue hardship or other issues.

• Reaffirming a debt involves risks such as continued financial obligation even after bankruptcy, potential repossession or foreclosure, and the limitation of your fresh start in bankruptcy. Additionally, you may end up paying more than the property’s worth and could face a negative impact on your credit score if payments are missed.

• Alternatives to reaffirmation include redemption, where you pay the current market value of the property; surrender of the property, which eliminates your debt obligation but impacts your credit; debt management plans (DMPs), which consolidate and reduce unsecured debts; debt settlement, where you negotiate to pay less than owed; and Chapter 13 bankruptcy, which involves a repayment plan allowing you to keep your property while paying back a portion of your debts. Each option has its benefits and drawbacks, requiring careful consideration to align with your financial situation.

What is a Reaffirmation Agreement in Michigan?

A reaffirmation agreement in bankruptcy is a voluntary contract between a Chapter 7 debtor and a creditor. In this agreement, the debtor agrees to continue paying a specific debt, even though it would typically be discharged through the bankruptcy process. In exchange, the creditor promises not to take any collection actions, such as repossessing property or garnishing wages, as long as the debtor makes the agreed-upon payments.

Most of the time, it does not make any sense to reaffirm a debt when you are in Chapter 7 bankruptcy proceedings. However, in some cases, most often with a car loan or a house, you may want to reaffirm the debt in order to keep the property. Some reaffirmation agreements allow a modification of the debt as well, but not always.

You do not want to reaffirm a debt if you would be unable to make the payments as laid out in the agreement or if it is something you do not really need. Creditors will often prepare a reaffirmation agreement for you to sign. It is often in their best interest to get you to sign a reaffirmation agreement and is to your advantage to have an attorney representing your case present to fight for your interests.

A reaffirmation must be filed before the entry of your discharge and no later than 60 days after the date of your first meeting of creditors. You may be able to extend the dealing by filing a request to the court, but you must file the motion before the discharge is entered.

You may rescind a reaffirmation agreement (change your mind) but it must happen before the entry of discharge or before the expiration of the 60-day period after the date the agreement was filed, whichever comes first.

Why Would I Reaffirm Debt in a Michigan Chapter 7 Bankruptcy?

Most of the time, it doesn’t make much sense to reaffirm a debt during Chapter 7 bankruptcy. However, there are cases, especially with a car loan or a mortgage, where you might choose to reaffirm the debt to keep the property. Some reaffirmation agreements may even offer a chance to modify the debt, but this isn’t always the case.

Keep in mind that creditors often benefit from getting you to sign a reaffirmation agreement. It’s vital to avoid entering into one if you’re not confident you can repay the debt.

Why Do I Need a Reaffirmation Agreement?

A reaffirmation agreement is a legal contract that allows you to continue paying off a debt even after filing for bankruptcy. This type of agreement can be especially useful if you want to keep property, like a car or a house, that might otherwise be repossessed.

One key reason to consider a reaffirmation agreement is to retain valuable property. If you can afford to continue making payments on a secured debt, this agreement can help you keep assets like your car or home. Additionally, while bankruptcy does harm your credit score, consistently paying off reaffirmed debts can help you start rebuilding it. Finally, by reaffirming a debt, you can avoid repossession or foreclosure, ensuring that your property isn’t taken back by the creditor.

Overall, a reaffirmation agreement can be a useful tool in certain situations during bankruptcy. However, it’s important to carefully assess your ability to manage the debt before committing to such an agreement.

How to Reaffirm a Debt?

Reaffirming a debt during bankruptcy involves a series of steps that need to be carefully followed. This process allows you to keep certain assets by agreeing to continue paying off a specific debt, but it requires both court approval and careful consideration.

• Step 1: Declare Your Intentions
  • Start by informing your creditor and the court of your intention to reaffirm a specific debt. This is done through the Statement of Intentions (Official Form 108), which is filed along with your bankruptcy forms.
• Step 2: Draft the Reaffirmation Agreement
  • Work with your creditor to create a reaffirmation agreement. This agreement must be documented and filed with the bankruptcy court.
• Step 3: Complete the Required Forms
  • Fill out two necessary forms: Form 27 (reaffirmation cover sheet) and Form 240A (reaffirmation agreement). Both forms must be filed with the bankruptcy court.
• Step 4: Obtain Court Approval
  • If you don’t have a lawyer to sign off on the reaffirmation agreement, it must be approved by the bankruptcy court to become legally binding.
• Step 5: Attend the Hearing
  • After filing the reaffirmation agreement, you will need to attend a hearing before a bankruptcy judge. The judge will review your case and decide whether to approve or reject the reaffirmation.
• Step 6: Consider Possible Rejection
  • The court is unlikely to approve your reaffirmation agreement if any of the following apply:
    • The loan is unsecured.
    • You lack sufficient income to make the monthly payments.
    • The interest rate in the agreement is excessively high.
    • The property’s value is less than the remaining balance of the loan you wish to reaffirm.

Reaffirming a debt is a significant decision in the bankruptcy process, requiring you to follow specific steps and meet court requirements. Understanding these steps and potential obstacles can help you navigate the process more smoothly and make an informed choice about your financial future.

What Are the Risks Involved in Reaffirmation?

When considering a reaffirmation agreement during bankruptcy, it’s important to be aware of the potential risks involved. Reaffirming a debt can have significant consequences for your financial future, and understanding these risks can help you make a more informed decision.

• Continued Financial Obligation

By reaffirming a debt, you remain legally obligated to pay it off even after your bankruptcy is finalized. If you face financial difficulties later on, you’ll still be responsible for making those payments, which can strain your budget.

• Potential for Repossession or Foreclosure

If you default on a reaffirmed debt, the creditor can repossess or foreclose on the property. This means you could lose your car or home despite going through bankruptcy.

• Impact on Fresh Start

Bankruptcy is meant to give you a fresh financial start by wiping out certain debts. Reaffirming a debt can limit this fresh start, as you’ll still be tied to the old debt you agreed to keep.

• Risk of Paying More Than the Property’s Worth

Sometimes, the property you’re reaffirming may be worth less than the debt owed. This means you could end up paying more than the property’s current value, which is especially risky if the asset’s value continues to decline.

• Negative Effect on Credit Score

If you fail to make payments on a reaffirmed debt, it can further damage your credit score. This could make it harder to rebuild your financial standing post-bankruptcy.

Reaffirming a debt can be a valuable tool for retaining important assets, but it comes with risks that need careful consideration. By understanding these potential pitfalls, you can make a more informed decision about whether reaffirmation is right for you and how to manage its impact on your financial recovery.

What Are the Alternative Options I Can Take?

When facing bankruptcy, reaffirmation isn’t the only option for handling your debts. There are alternative strategies that might better suit your financial situation and help you navigate your bankruptcy more effectively.

• Redemption

Redemption involves paying off a secured debt for the current market value of the property rather than the full amount owed. This can be a good option if the property’s value has decreased significantly. You can negotiate with your creditor to settle the debt at a lower amount, which must be paid in a lump sum or through a court-approved plan.

• Surrender of Property

Surrendering means giving up the property that secures the debt, allowing the creditor to repossess or foreclose on it. If you decide not to reaffirm a debt, you can choose to surrender the property, which will typically eliminate your obligation to the debt, although it may affect your credit score.

• Debt Management Plans (DMPs)

A debt management plan involves working with a credit counseling agency to consolidate and pay off unsecured debts through a structured payment plan. The agency negotiates with creditors to lower interest rates and monthly payments. You make one monthly payment to the agency, which distributes the funds to your creditors.

• Debt Settlement

Debt settlement involves negotiating with creditors to pay less than the full amount owed to settle the debt. Typically, you work with a debt settlement company or negotiate directly with creditors to reach a reduced payment amount. This option may negatively impact your credit score and could result in tax implications for forgiven debt.

• Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, you create a repayment plan to pay back a portion of your debts over three to five years. Unlike Chapter 7, which discharges debts, Chapter 13 allows you to keep your property while making affordable payments according to a court-approved plan.

Exploring alternatives to reaffirmation can provide you with more flexibility and options for managing your debts during bankruptcy. Each alternative has its own set of benefits and potential drawbacks, so it’s important to carefully consider which option aligns best with your financial goals and circumstances.

Call Our Bankruptcy Attorney Now!

Understanding what a reaffirmation agreement is and why it might be necessary can significantly impact your financial future during bankruptcy. By reaffirming a debt, you can retain valuable property and potentially rebuild your credit, but it’s vital to weigh the risks and benefits carefully. Each individual’s situation is unique, and making the right choice involves understanding the specific implications for your financial health.

If you’re considering a reaffirmation agreement or need guidance on your bankruptcy options, reaching out to a bankruptcy attorney can provide valuable insight. Hammerschmidt Stickradt & Associates offers consultations and has legal offices in Royal Oak, Walled Lake, and Wyandotte. Contact them today to discuss your options and get the support you need for your financial well-being.