What Are the Bank's Options on Reaffirmation After Bankruptcy?
Debtors frequently agree to pay a debt that they could eliminate through bankruptcy, or reaffirm it. In general, if a debtor in bankruptcy does not reaffirm a debt owed to a bank, the bank has few ways to collect on an account. In addition, reaffirmation agreements do not always work because a court may reject the agreement. Thus, the bank may need to rely on the debtor voluntarily paying on the account to recoup its loss.
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Reaffirmation Options
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Bankruptcy courts usually discharge debts not secured by tangible property. If the debtor owes money on real property, such as a car or mortgage, the bank can make a reaffirmation agreement a requirement of the debtor keeping the property. If someone co-signed the loan, the bank can threaten to go after the co-signer for payment if the primary account holder does not reaffirm the debt. Sometimes, the bank requires a reaffirmation agreement to stop the bank from filing a lawsuit if the debtor committed some kind of fraud to acquire the loan, such as lying about his income.
Voluntary Payments
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Debtors sometimes repay a loan after discharging it in bankruptcy to maintain a good relationship with a bank. For example, a company may want to pay a discharged debt after bankruptcy in case the company hopes to do business with the bank in the future. Voluntarily paying a debt allows a debtor to keep an account and reserve the right to declare bankruptcy on the loan in the future. Most banks require a reaffirmation agreement if the customer wants to keep an account or secured property. For instance, about 65 percent of car loan lenders require a reaffirmation agreement as a condition of the debtor keeping a car after bankruptcy, according to Justin Harelik of Bankrate.
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Benefits
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The lender can and usually will repossess property immediately if the debtor falls behind on another payment after bankruptcy. If the debtor signs a reaffirmation agreement, the bank likely will send warnings and offer more leniency after a missed payment. In addition, the lender usually only sends monthly billing statements or coupons if the borrower reaffirms the debt. Reaffirmed debts appear on the customer's credit history and help to rebuild his credit rating after bankruptcy.
Considerations
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A bankruptcy judge must approve a reaffirmation agreement in most cases. The judge will investigate whether the debtor can afford the loan after bankruptcy. The debtor should also consider whether he can afford to reaffirm the debt and if keeping the account benefits him. For example, the debtor may not want to reaffirm a car loan for a vehicle worth less than the balance due on the account unless he cannot acquire another car. An unemployed person may not want to take on the liability of car payments unless they are extremely low.
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