Reaffirmation is a way to keep certain assets during a bankruptcy that you might otherwise have to forfeit. A Chapter 7 discharge will wipe out your personal liability for dischargeable debts (including mortgages and auto loans). However, if you are current on the monthly payments and want to keep the item the creditors will routinely forward a new agreement with the original terms (or sometimes even slightly better terms) for you to sign thus reaffirming those terms in a new contract.
When you finance the purchase of a home or a car the lender will have a lien on the house or car (it is their collateral for the loan). Under a Chapter 7 debt discharge scenario, the lien remains attached to the collateral, and the creditor will still have the right to foreclose or repossess if you don’t make your payments. Debts like these (where your property can be held until the loan is repaid) are called secured debts.
When you reaffirm a secured debt, you are in essence signing a new agreement that reaffirms your personal liability on the loan. In other words, you are signing away your discharge rights on the debt you are reaffirming. This is a serious commitment and one that you should consider carefully. It is advisable to consult with your bankruptcy attorney before taking this step. Keep in mind that a reaffirmation agreement must be filed within 60 days after the meeting with the bankruptcy trustee.
Here are some reasons why you might want to reaffirm a debt:
- Rebuild your credit. When you reaffirm a debt, your payments on that loan will continue to be reported to the credit reporting agencies by the lender; this will aid you in the credit rebuilding process.
- Opportunity to renegotiate with lender for more favorable loan terms since the reaffirmation constitutes a new contract.
- Prevent repossession or foreclosure when you want to continue making payments on the loan.