The flexibility of bankruptcy, even Chapter 7 bankruptcy, can help you keep certain assets while discharging burdensome debt. A reaffirmation agreement is one example. You may fear you will lose a car that has an outstanding loan balance. However, if you sign a reaffirmation agreement, you agree to keep paying off the remainder of the loan so you can keep the vehicle.
If you are not familiar with how a reaffirmation agreement works, there are some important facts you should know about it before trying to secure one. While a reaffirmation agreement can be beneficial, it has potential downsides that might harm you if you are not careful.
They are voluntary
According to the Justice Department, bankruptcy law does not require you to sign a reaffirmation agreement. These are completely voluntary documents. You might consider committing to one at first, but then you look at your situation and find you cannot pay off your vehicle or another asset even with your debt discharged. If so, no one should force you into going forward with an agreement.
They expose you to collection risk
If you decide to reaffirm a debt, be sure you can pay it off. If your financial situation worsens again and you cannot make debt payments, you will owe the debt without regard to your previous bankruptcy. A judge will not discharge your debt and your creditor can undertake collection actions like placing a lien or repossessing your property. A creditor could even go to court to recover a judgment against you.
They may allow renegotiation
You may feel confident you can pay off a loan, but just not under the original terms. If you want to reaffirm a debt, doing so may allow you to renegotiate the terms of your loan with your lender or creditor. Many lenders understand that their clients go through times of trouble and have hardship programs to delay payments or temporarily lower payments. Be sure of your options before committing to a course of action.