Like most individuals and business owners, many of our clients are new to the bankruptcy process. Many people view the bankruptcy process as being a perpetual black mark on their credit and an indictment of their personal character. This couldn’t be further from the truth. In fact, bankruptcy is a legal process specifically designed to help those who have struggled financially for any reason. As you embark on the journey of filing for bankruptcy in Mankato, MN—especially with the legal advice and assistance of the attorneys at Behm Law Group, Ltd.—you will find that bankruptcy is a helpful, rehabilitative and, possibly, cathartic experience.
Chapter 7 (or liquidation) bankruptcy is the most common form of bankruptcy for individuals and small businesses. One aspect of filing for bankruptcy that allows you to alter the “black and white” situations occurring frequently in Chapter 7 bankruptcy is the subject of reaffirmation agreements.
What is a reaffirmation agreement?
A reaffirmation agreement is something that is unique to Chapter 7 bankruptcy. A bankruptcy filing nullifies one’s legal, contractual obligations to pay one’s debts. This applies to all debts, except those debts that may be exempted from discharge under 11 U.S.C. §523 such as child support debts, student loans, criminal fines and certain tax debts. This means that one is no longer required to pay one’s credit card debts, medical debts, vehicle loans or home mortgage loans. However, one may wish to retain certain debts such as vehicle loans or home mortgage loans. One does this by completing a reaffirmation agreement. A reaffirmation agreement is an entirely voluntary agreement between a debtor and a creditor that recites the terms and conditions of the original loan or mortgage. By signing a reaffirmation agreement a debtor and an impacted creditor agree that the terms and conditions of the original loan or mortgage will be exempted out of the bankruptcy process and will continue after the bankruptcy process has been completed. They essentially agree that a debtor will continue to be personally liable for the loan or mortgage after the bankruptcy has concluded. Reaffirmation agreements, in most cases, must be approved by a bankruptcy court.
Why are they beneficial?
Reaffirmation agreements allow you to work with creditors to keep some debts in place, letting you maintain that property or asset. They allow one to retain debts on assets, such as a house or a vehicle, which may be essential for one’s financial rehabilitation going forward. Reaffirmation agreements can have positive and rehabilitative credit rating implications because creditors will continue to report one’s ongoing payments to the three big credit reporting agencies – Experian, Transunion, and Equifax. Positive and consistent reporting by creditors after a bankruptcy has concluded can cause one’s credit rating to rise.
How can they be dangerous?
Because you must sign a reaffirmation agreement before your debts are discharged, you have to be 100% sure that you can continue meeting payments for any debt you want to reaffirm. In fact, we often advise against signing reaffirmation agreements unless it’s certain you will meet regular payments without hardship after the bankruptcy process is complete. If you aren’t sure, you could add to your financial struggles even after other debts are discharged. The signing of a reaffirmation agreement means that one will be personally responsible for a debt after a bankruptcy has concluded. If one were to sign a reaffirmation agreement on a vehicle loan, for instance, and if one were not able to continue making payments on the debt, the creditor could repossess the vehicle and sell it. If there was any remaining deficiency balance (i.e. the sale price of the vehicle was not sufficient to retire the entire debt), one would be fully liable on such debt and the creditor could pursue collection remedies against the person.
If you’re unsure whether choosing Chapter 7 or entering into a reaffirmation agreement is right for you, contact Behm Law Group, Ltd. at (507) 387-7200 for more information about bankruptcy in Mankato, MN.
