Most residents of New Jersey who file a bankruptcy petition intend to complete the process and discharge as many of their debts as possible. Occasionally, however, a debtor discovers that the consequences of a discharge may deprive him of a valuable and necessary asset. In such cases, debtors may seek the court’s approval to reaffirm the underlying agreement that created the debt. Such agreements are called “reaffirmation agreements,” and they can be surprisingly helpful.
How does a reaffirmation agreement work?
First, the debtor must identify one or more obligations that involve a secured transaction. A common example is an installment loan agreement that was used to purchase a motor vehicle. The debtor may decide that the business has no hope of survival without the availability of a reliable car or truck. In such cases, the debtor may decide to approach the creditor with an offer of a revised loan payment schedule. If the creditor agrees to the debtor’s proposal, the parties will execute a new agreement covering payment of the balance of the loan. The new agreement is called a reaffirmation agreement.
The Bankruptcy Code requires the Court to approve the form and substance of the new agreement. Payments under the existing agreement must be current or must be brought current before the new agreement takes effect. If the debtor was represented by counsel, the lawyer must also sign the agreement. If the debtor was not represented by a lawyer, the debtor must signify in writing that the terms of the new agreement are clearly understood and that the debtor’s agreement to the new terms was given voluntarily and without coercion.
If the debtor defaults on the new agreement, he or she must wait eight years before seeking to have the reaffirmed agreement discharged in a subsequent bankruptcy proceeding.
The value of professional advice
The decision to reaffirm a debt can be very complex. A debtor considering such a decision may benefit from consulting with – or hiring – an experienced bankruptcy attorney. A knowledgeable bankruptcy lawyer can evaluate the wisdom of the reaffirmation agreement and can help the debtor negotiate with the creditor.