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The advantages and disadvantages of reaffirming a debt

Most people in Central Florida who decide to file a petition for bankruptcy expect to have all their debts wiped out when the proceeding concludes. What many of these people do not realize is that some debts may be "reaffirmed" - that is, they may decide to shield certain debts from the discharge powers of the bankruptcy court.

A prime example of reaffirmation of a debt is the decision by the debtor to continue to make payments on the mortgage loan for the family home. If the debt were not reaffirmed, the lender could foreclose on the mortgage and take possession of the house in such situations. The debtor usually renegotiates the terms of the mortgage loan with the lender. Renegotiated terms may include the interest rate, the amount of future payments and payment or reduction of any delinquency. A second useful example of debt reaffirmation is reaffirming the installment payment contract for an automobile or other secured asset. The reaffirmation of the underlying debt creates a new contract between the debtor and the secured party, and the debtor retains possession of the asset.

The formalities of reaffirmation are few, but they must be followed. The reaffirmation must be in writing and must be signed by the parties before the order for discharge is issued. The debtor must then file the agreement with the court. The Bankruptcy Code enumerates several disclosures, including the amount of the debt being reaffirmed, the terms of payment and a statement that the debtor's personal liability will not be discharged by the order for discharge. The debtor must also demonstrate that his income after expenses is sufficient to make payment on the reaffirmed debt.


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