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You Deserve Financial Relief

Russell G. Small and Kenneth Lenz

The advantages of reaffirming a debt during bankruptcy

| Sep 19, 2020 | Bankruptcy

When residents of Connecticut consider filing a petition for discharge of their debts in a Chapter 7 bankruptcy, they look forward to the day when the court issues its final order. Most people think that the issuance of the order for discharge is their primary goal in bankruptcy, but that attitude often overlooks one of bankruptcy’s major tools for regaining financial self-sufficiency – the reaffirmation of one or more secured debts.

Most people who file a Chapter 7 petition have at least one or two secured debts, such as a loan secured by a mortgage on the family residence or loan that was used to purchase an automobile. In both cases, the creditor has the right to repossess the property if the debt is not repaid. If these debts are not reaffirmed, the order for discharge will in effect make the loan uncollectible and the creditor will be allowed to exercise its rights against the asset in question. With respect to the family residence, the creditor may elect to foreclose the debtor’s equity of redemption and retake possession. The same result may allow a bank that has loaned money for purchase of an automobile to repossess the car.

Reaffirming such debts will allow the debtor to retain possession of the asset that is providing the security. In effect, the reaffirmation agreement is a new loan contract between the debtor and the creditor who holds the security interest in the asset. The terms of the agreement may be identical to the original agreement or, as is more likely, one or more terms will change. In either event, the debtor will be allowed to retain possession of the asset and will be required to make regular payments under the reaffirmation agreement.

The bankruptcy code imposes a number of detailed requirements on reaffirmation agreements. The advice of an experienced bankruptcy attorney is an essential party in negotiating and executing a reaffirmation agreement. In fact, the bankruptcy forms that must be submitted to the court require that the debtor be represented by an attorney or that the debtor discloses what efforts, if any, were made to retain a lawyer.

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