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How do I reaffirm a debt?

Reaffirmation helps debtors retain cars or homes when faced with bankruptcy

How to keep their most important possessions - usually the family home and vehicle - is one of the biggest concerns faced by people planning to file bankruptcy. Included in the bankruptcy code is an option for that reason, if the court is convinced it can be used without driving individuals into greater debt.

The process is reaffirmation, and it begins when the debtor asks the U.S. Bankruptcy Court to approve their plan in order to pay a particular debt and not include it in the bankruptcy.

"Reaffirmation agreements are strictly voluntary. When you reaffirm a debt, you continue to be legally responsible for paying it back," according to the Reaffirmation Project in Georgia. "This can have serious financial consequences. Therefore, reaffirmation agreements must not impose an undue burden upon you or your family and must be in your best interest."

For instance, if a debtor reaffirms the debt on a car and they later aren't able to keep up with the payments, the creditor may repossess the vehicle, sell it to someone else or sue the debtor for all the money still owed, which is called a "deficiency balance." Also, debtors should keep in mind that not all lenders will agree to sign a reaffirmation agreement.

If a person has second thoughts about reaffirming a debt, the agreement can be rescinded within 60 days of its filing with the court, or at any time before the bankruptcy is discharged, whichever is later. The creditor must be notified in writing that the debtor wants to end the agreement. The positive side to a reaffirmation is that it may help debtors keep a home or vehicle, but also speed their financial recovery by continuing to make mortgage or car payments without the burden of other bills discharged in the bankruptcy. Future payments will be reported to the credit bureaus, and rebuilding credit will become easier post-bankruptcy, according to Bankrate.com.

However, there is a down side to reaffirmation. If the debtor reaffirms a debt and later defaults on it, the creditor can take legal action to be paid or regain the property. In cases when debtors choose not to reaffirm, but continue to make voluntary payments, the debt will be discharged in the bankruptcy. But if a default occurs later, the lender will only be able to file legal action to regain the property, not to pursue collection efforts against the debtor.

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