Saturday, December 8, 2012

How does a reaffirmation agreement work in a chapter 7 bankruptcy?

A reaffirmation agreement is an agreement between a creditor and debtor in which it is agreed upon that a debt, which would otherwise be discharged as part of filing for bankruptcy by means of a chapter 7 bankruptcy, will be paid.

A typical example of where a reaffirmation agreement would come into place when filing bankruptcy is when the debtor wishes to keep his vehicle. The vehicle will have a loan on it but the debtor wishes to keep the vehicle because it is needed to drive to and from work and is necessary as the debtor's only means of transportation.

This example only comes into effect when the file for bankruptcy is by means of a chapter 7. In a chapter 13 bankruptcy the vehicle loan is retained and paid through the bankruptcy plan.

Reaffirmation agreements pose a number of bankruptcy questions and can sometimes cause problems and issues that occur. The bankruptcy attorney representing the debtor has to sign an affidavit attesting to a number of representations. The bankruptcy lawyer is attesting to the fact that the payment on the car loan will not present a financial hardship to his client. Also according to bankruptcy law,the bankruptcy attorney is representing he or she has fully advised their client on the legal repercussions of the reaffirmation agreement and that their client is doing so voluntarily and having been fully informed.

In some chapter 7 bankruptcy cases the bankruptcy lawyer is not prepared to sign the affidavit. Essentially bankruptcy attorneys sometimes think their clients cannot afford to make the payments on the debt that is being reaffirmed. In these types of situations, according to bankruptcy law, it is up to the judge to decide if the debtor can in fact afford to make the payment.

Other complications involving a reaffirmation agreement in a file for bankruptcy are the process of qualifying alone dictates that the debtor cannot have substantial funds remaining after the allowable IRS expenses. Hence having leftover funds to absorb the car loan payment may disqualify the debtor from the eligibility of filing for bankruptcy.

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