Many clients are interested in reaffirming debts in their bankruptcy case. Reaffirmation is the way that a debt survives the discharge in a bankruptcy case. The process of reaffirmation allows the lender and debtor to agree to the new repayment terms. However, the bankruptcy court must approve a reaffirmation agreement and be sure that it is in the best interests of all parties involved Generally, people will reaffirm debts related to real property, such as a mortgage, or vehicles. The idea behind reaffirmation is that a person wants to keep a property or vehicle and therefore wants to continue paying the debt so that they can keep the property or vehicle. There are a few things that I think are important to know when deciding with your bankruptcy attorney whether you should reaffirm debts.
It is important to know that real property and vehicles are treated differently with respect to reaffirmation. Generally, if you do not reaffirm the debt related to a vehicle, a vehicle can be repossessed by the lender without any further legal action by the lender. This is true even if it was your intent to continue paying the loan after your bankruptcy is finished. In fact a lender is allowed to make this decision even if they have collected several payments after the discharge of your bankruptcy case. If you did not reaffirm the debt related to a vehicle it is important to ask your lender what their policy is when no reaffirmation is submitted to the bankruptcy court or when a reaffirmation is rejected by the court. Some lenders will allow you to retain the property as long as you do not miss payments.
Real property, in contrast with a vehicle, can be retained despite no reaffirmation being approved by the court. While vehicle retention without reaffirmation is usually a lender-preference affair, real estate retention depends only on a person's willingness to continue making payments. As long as all payments are current, a lender on a mortgage may not foreclose on the property even though the debt was discharged in a bankruptcy. The real advantage here is you can retain the benefit of the property while having peace of mind with the knowledge that if you ever want to, or need to stop making payments you can do so without needing to worry about future financial consequences.
My next entry will be about some other considerations regarding reaffirmation of debts.