Pros and Cons of Reaffirming a Debt in a Chapter 7 Bankruptcy

A Chapter 7 bankruptcy offers a fresh start by relieving a debtor of most or all financial obligations to creditors. Although non-exempt property can be liquidated during the process, there may be some property the debtor wants to keep, such as real estate or a vehicle. Reaffirming a debt on such property can be a beneficial strategy not only for keeping the asset but also for negotiating reductions in payments, interest rates or total amounts due.

If you’re in Chapter 7, reaffirming a debt on a specified asset means making an agreement with a creditor that you will continue to pay all or a portion of the owed amount that would otherwise would be discharged in the bankruptcy proceeding. In return, the creditor agrees not to repossess or take back the property so long as you continue to make payments. The benefit to you is that you get to keep your property.  

The bankruptcy code has strict requirements that must be met for debt reaffirmations to be enforceable. For one, you’ll need to be current on the loan and be able to protect the property’s equity with a bankruptcy exemption. If there is any amount of equity that isn’t safeguarded by an exemption, the property may be sold by the bankruptcy trustee to pay off creditors.

The debt reaffirmation agreement must be in writing, signed and entered into voluntarily. A creditor must not have pressured or coerced you. In addition, the courts will not allow a debt reaffirmation if it would cause you undue hardship. The reaffirmation means you will still be responsible for the loan after your bankruptcy case concludes. If you fail to make the promised payments, the creditor is entitled to commence a legal action against you or seek to repossess the property. 

A Chapter 7 attorney can advise you of any legal ramifications of entering into the debt reaffirmation agreement. If you don’t have an attorney, the court will schedule a hearing to ensure the agreement is voluntary and will not result in undue hardship. A debt reaffirmation may be canceled in some cases, either before the court issues a discharge or within 60 days of filing the agreement with the court.

Jeff Field & Associates represents debtors in Chapter 7 proceedings throughout the Atlanta metropolitan area, with offices conveniently located in Athens, Douglasville, Gainesville, Lawrenceville, Marietta, and Scottdale. To schedule an appointment, call 404-381-1278 or contact us online.