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Can a Reaffirmation Agreement Help When You File for Bankruptcy?

ticking clock with the word bankruptcy on it


By:Mike Cibik


What is a Reaffirmation Agreement and How Does it Help a Chapter 7 Bankruptcy?

Chapter 7 bankruptcy controls the process of asset liquidation. The first question that is typically asked under this type of filing is the order in which debts must be paid and if the current debts are secured or unsecured. A secured debt is backed by collateral to reduce the risk of lending. The collateral will be used to repay the debt in cases where the borrower becomes insolvent and does not have the financial backing to repay. An unsecured debt is not backed by collateral but instead relies on a hierarchy of classes that determines who is paid first when making lenders whole. A common issue for an unsecured creditor is that it may require the assistant of a bankruptcy attorney to handle a debt collection lawsuit, to determine if there is a security interest for which the lender can latch onto to receive repayment.

When someone chooses to file for bankruptcy under Chapter 7, it is important for them to evaluate every option available under their filing. Bankruptcy lawyers are an excellent resource when looking at the options that are best suited for a bankruptcy filing. Bankruptcy typically breaks the contract between the borrower and creditor but a special process called reaffirmation exists that allows the contract to be renegotiated, advised to be under the supervision of bankruptcy lawyers, with a new contract that allows the borrower to keep property while retaining the debt.


How is Reaffirmation Helpful?

Reaffirmation gives you more options than just losing your property in the process of liquidation to pay off debts. Sometimes, there are certain pieces of land or property that cannot be sold as a part of liquidation because, without them, someone may no longer be able to run their business, or go home, or even have a mode of transportation after the bankruptcy proceedings. While the are various definitions of bankruptcy, many companies file with a well-thought-out and detailed plan that they believe will turn their financial portfolio around by eliminating a certain amount of debt. The process of reaffirmation allows the person to follow their new financial plan and keep their property as long as they abide by the terms of the reaffirmation agreement and maintain a prompt payment schedule. This process keeps the property out of the reach of the lender and allows the borrower to negotiate lower payments, lower interest rates, or the total debt owed over the life of the loan.


When Should You Enter a Reaffirmation Agreement?

Reaffirmation leaves you in debt after bankruptcy and is not the right decision for everyone. The decision should be carefully thought out and individuals should seek legal advice whenever important financial decisions are being made that could affect the long-term life of their financial portfolio. It is also important to consider the creditor’s feelings and how easy they are to work with because some creditors will not be willing to negotiate terms if they believe there is no way that the company will remain solvent post-bankruptcy. You need to be selective with the property that they choose to keep as well and make sure that it is imperative to retain ownership. Sometimes this comes down to a matter of necessity or the fact that maybe the debt owed on a specific piece of property is significantly less the value of the property.

It is important to remember that maintaining your way of life depends on the amount of money you have. Debt can get in the way of your livelihood if you do not make the right financial decisions. Should you have any questions or potentially believe that you should file a Chapter 7 bankruptcy claim, please contact the Cibik and Cataldo P.C. team at (215) 735-1060 for a free consultation.


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