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What does debt reaffirmation mean?

Some debts can be kept out of bankruptcy through reaffirmation

There are some debts that people would rather keep paying than include them in their petition to the U.S. Bankruptcy Court. In such cases, reaffirmation is a process that allows certain accounts to be kept outside the bankruptcy.

Reaffirming a debt is most often related to home mortgages and car loans, allowing people to continue making payments so they can keep their property rather than liquidate it to pay off creditors in a Chapter 7 case.

The reaffirmation process begins when debtors disclose in the bankruptcy filing how their secured debt - loans that are backed by tangible assets - is going to be handled. It can be surrendered to the creditor, sold to pay the bill or reaffirmed.

However, choosing to reaffirm is not to be taken lightly. Also, not all lenders will agree to a reaffirmation.

"When you reaffirm a debt, you continue to be legally responsible for paying it back," according to the Atlanta Legal Aid Society's Reaffirmation Project. "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 money owed on a car and later isn't able to keep up with the payments, the creditor may repossess the vehicle or sell it to someone else. In addition, the debtor could be sued for the money still owed, which is called a "deficiency balance." If a person has second thoughts about reaffirming, the agreement can be rescinded within 60 days of its filing with the court, or at any time before the bankruptcy is discharged, whichever is later.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 people keep a home or vehicle and speed up their financial recovery by allowing them to make mortgage or car payments without the burden of other bills, which are discharged in the bankruptcy. Payments will continue to be reported to the credit bureaus, according to Bankrate.com, which could help people improve their credit scores.

"This usually allows you to rebuild credit more quickly post-bankruptcy," writes Los Angeles attorney Justin Harilek on the website. "Going forward, adhere to the terms of the original agreement that existed prior to the bankruptcy. As long as you continue to make your payments, the mortgage lender cannot force you from your home."

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