When filing for Chapter 7 bankruptcy, most debts are discharged, providing a fresh financial start. However, some choose to sign a reaffirmation agreement – a voluntary contract to continue paying a debt even after bankruptcy.
These agreements are most often used for secured debts like car loans, but they can have lasting consequences. Understanding how reaffirmation agreements work is essential before you sign anything.
Why debtors consider reaffirmation
In many cases, they agree to reaffirmation because they want to keep collateral, such as a vehicle. In other situations, a debtor chooses a reaffirmation agreement to maintain a relationship with a creditor. Signing can allow you to retain property that might otherwise be repossessed.
Risks of reaffirmation agreements
Reaffirming a debt means that you will continue to be responsible for future payments. If you default on the payments, the creditor can repossess the collateral and pursue any deficiency balance. Unfortunately, this can undermine the “fresh start” bankruptcy is designed to provide.
Court approval and Maryland practice
In Maryland, reaffirmation agreements must be filed with the bankruptcy court. Judges review them to ensure they do not impose any undue hardship. If you do not have legal representation, the court may hold a hearing to confirm that you understand the consequences.
Potential alternatives to reaffirmation
Some choose to redeem the property by paying its current value in a lump sum. Others may continue making voluntary payments without signing a reaffirmation agreement, if possible. These options can sometimes reduce risk while still allowing debtors to keep essential assets.
Reaffirmation agreements are entirely optional and require careful consideration. Consulting with a legal professional can help you weigh the pros and cons from an informed perspective.