The purpose of a bankruptcy is to discharge debts. So why would someone want to re-obligate themselves for a debt that would otherwise be dischargeable?
If someone files a bankruptcy while having secured property (a mortgage, car loan, store property, etc,) they will have to complete a Statement of Intention in which they advise the secured lenders that they want to either: a) retain the collateral; b) redeem (pay the current value of the collateral to the lender); or c) surrender the property.
The understanding is if the debtor chooses to retain the collateral, they will also sign a reaffirmation agreement to re-obligate themselves on the underlying debt. Accordingly, if the debtor chooses to keep the property and continue making their normal monthly payments, the debtor then must decide whether or not to actually sign or not sign the reaffirmation agreement.
The benefit to executing the reaffirmation agreement is that all future payments made by the debtor will then be positively reported to the credit reporting agencies, thus helping to rebuild the debtor’s credit. The negative aspect of executing a reaffirmation agreement is that the Debtor re-obligates himself on the underlying debt, so that any future default will allow the lender to pursue the debtor for the monetary loss – the exact thing they were seeking to avoid by filing a bankruptcy.
Although it is important to discuss the pros and cons of a reaffirmation agreement with an attorney, in general this author believes the cons of executing a reaffirmation far outweigh the pros.
by: Justin. H. Dion, Esq
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