The bankruptcy laws are voluminous and complex. There are a lot of things people do not understand about bankruptcy, urban legends if you will. One of the most common misconceptions is that when you file for bankruptcy, you can keep your things without paying. This is just not the case. While it is true that you are able to keep the things you want, you do have to continue to make payments on those items. For instance, if you are going to remain in your home, you still have to make the mortgage payments. The same goes for your car, or other debts that are secured by a lien.
The way you keep paying for your things is called a reaffirmation agreement. A reaffirmation agreement is essentially the same as entering a new loan contract with the lender. The agreement will set forth the amount due and the repayment terms. Failure to abide by these terms results in the lender being able to sue you for the money that is due. Because this seems contradictory to the purpose of bankruptcy, it is important to know the benefits of reaffirming a debt. Some of these benefits include:
- Faster rebuilding of your credit
- Maintaining a good relationship with the lender, which could benefit you in the event you are unable to make payments in the future and need to ask for an extension or other grace periods. Remaining in good standing with your lender is also helpful if you need to apply for credit at some time after the bankruptcy case is completed.
- Reaffirming the debt allows the creditor to discuss the account with you, absent such an agreement the lender is prohibited from talking to you about the debt since it is technically no longer owed.
The most important part of the decision to reaffirm a debt is knowing that when you do so, the debt is still due even after the bankruptcy case is over. This is unlike other debts, which are "wiped out" by filing bankruptcy. Typically the types of debts that are reaffirmed are secured debts, which are those obligations where the lender has a lien on the collateral until the loan is paid in full. Most home and auto loans are secured debts. In contrast, an unsecured debt is that debt for which there is no lien on any property. Credit card debt is the most common form of unsecured debt. There is no benefit to reaffirming an unsecured debt, since it will remain due after bankruptcy and the purpose of bankruptcy is to eliminate burdensome financial obligations. Credit cards typically have high interest rates and continuing to make payments without making headway does not provide the debtor a fresh financial start.
For more information about bankruptcy and when to reaffirm, call our office. We offer an individualized approach, and work with you to develop a strategy that meets your needs. Contact our office today for answers to the questions that matter most to you.