Basic Overview

Most people assume that bankruptcies wipe away all outstanding debt in all cases, without exception. This is simply not the case, and in some instances debts aren’t wiped out because of the voluntary election of the debtor. If, for whatever reason, a debtor chooses to voluntarily pay back a debt which would normally be eligible for discharge under bankruptcy, that debtor can create a “reaffirmation agreement” with the creditor. A reaffirmation agreement is essentially a separate contract established between a debtor and a creditor which preserves the debt and prevents it from being discharged in a bankruptcy. Debtors choose to create these agreements for all sorts of reasons; one common reason is to preserve the underlying asset, such as an automobile, because of its functional utility to the debtor. Reaffirmation agreements are usually used in a Chapter 7 bankruptcy and normally for a debtor who wants to keep a vehicle. If the debtor is current on the car payments at the time of filing a Chapter 7, the debtor will often be given an opportunity to reaffirm the debt in order to keep the car instead of discharging the debt and returning the vehicle to the creditor. A Chapter 13 debtor may not be required to execute a reaffirmation agreement because the debtor can simply include payments for the collateral within the plan in order to keep the vehicle. Even if the Chapter 13 debtor is behind on the car payments, the delinquent payments as well as current payments can be included in the Plan without the need for a formal reaffirmation agreement. Whatever the reason may be, these agreements are completely valid and can be created on a voluntary basis between the two parties. The voluntary aspect of these agreements is key – a debtor is never under any obligation to initiate one of these agreements, and so they are created entirely on an “at will” basis.

Reaffirmation vs. Retain and Pay

In some cases, a formal reaffirmation contract is not necessary in order to preserve the debt and pay it back. If a debtor is currently not delinquent with payments, and simply wishes to continue making regular payments as normal, some lenders will allow this practice. Of course, even without a reaffirmation agreement, the debtor needs to notify the bankruptcy trustee and make sure that the particular debt in question isn’t discharged. But, in theory, it’s possible to choose a “retain and pay” option, which means that the debtor simply retains the debt and pays as normal, without a formal contract. Importantly, this option isn’t recognized by all lenders, and so the debtor needs to check with each lender before making a plan of action. Some lenders, for instance, will require a formal reaffirmation agreement in order to preserve the debt.

Reaffirmation Procedure: Form 240A

Like everything else in the context of bankruptcy law, reaffirmation agreements follow a specific structure. If you wish to pay back a particular debt, you need to formally identify that debt and complete a Form 240A. This form will include all sorts of information regarding the debt – the total amount owed, the nature of the debt, the nature of the collateral, the value of the collateral, and the reason for the reaffirmation (as opposed to discharge). Both parties will sign the agreement to make it enforceable. However, before the parties sign, the agreement will need to be reviewed by a judge. The judge will review the agreement and help to determine whether the debtor is able and best served by signing the agreement. In some cases, judges may advise against the agreement, such as those cases in which a debtor’s income is not sufficient. In other cases, judges may disallow the agreement because the value of the collateral is too low as compared with the face value of the debt itself. When a reaffirmation agreement is approved and signed, it becomes the legal responsibility of the debtor, and so the creditor has the ability to compel payment via collection if the debtor subsequently fails to pay.

Contact Financial Freedom Advocates for More Information

If you’d like to learn more, or you’re interested in using bankruptcy as a debt relief option, contact Financial Freedom Advocates for more information by calling 786-668-6688. At FFA, we know that debt relief can be a viable strategy for rebuilding your financial future. Call us today to learn more.