What is the Reaffirmation Agreement Used For?

In bankruptcy proceedings, a debtor may have the opportunity to retain collateral under secured creditor agreements. To do so, the debtor must file what's known as a reaffirmation agreement with a creditor. This agreement basically states that the debtor will continue to pay all or part of the debt obligation to the creditor -- bankruptcy notwithstanding -- in order to retain the property or real estate holding.

The reaffirmation contract is usually overseen by an attorney, but if the debtor does not have a bankruptcy attorney present, the judge in charge of setting the protocols for the bankruptcy trial may have to approve the contract and act as a de facto advocate for the debtor. In any case, the debtor will have to answer a number of questions about the reaffirmation agreement -- whether he or she will be able to make good on the loan despite the circumstances of bankruptcy, whether the property in question is essential for daily living (e. g a car/truck or a home), and whether the debtor has the means to make good on the terms discussed in the agreement.

Bankruptcy codes and courts will never force debtors to enter into reaffirmation agreements. However, creditors are not obligated either to participate in such agreements. Remember that the guarantee against repossession is not absolute. If the debtor fails to make good on the stipulations in the reaffirmation agreement, a creditor can and most likely will proceed with foreclosure or repossession proceedings against the collateral.

Most bankruptcy courts will encourage debtors to think about the reaffirmation agreement over a cooling off period. If at the end of this timeframe, the debtor still wants to move forward with the collateral arrangement, the debt in question will no longer be discharged according to bankruptcy proceedings.

It's possible to engage in multiple collateral arrangements during bankruptcy, but if the debtor has the means to manage multiple collateral reallocation agreements, it may not be wise from a credit point of view to initiate bankruptcy proceedings. Speak with your bankruptcy attorney about the nuances and subtleties of this kind of creditor arrangement before you discuss them with your creditors directly.