“Reaffirming” a debt is an option you have after completing a Chapter 7 bankruptcy. It means you’re once again taking on responsibility for that debt, and intend to pay it.
This may seem like a loony thing to do when the courts have just released you from all legal obligations to touch the debt ever again. Yet some people do have good reason to reaffirm some debts.
To maintain a good relationship with friends and family members.
Americans borrow $184 million from friends and family members every year.
Many of our clients ask if they can simply keep these debts out of the bankruptcy. They do this either because they don’t want to strain their relationship with their loved ones, or because they don’t want their loved ones to know they’re declaring bankruptcy in the first place. Indeed, many relationships are ruined when someone fails to pay back even very small amounts of cash.
Unfortunately, by law you’re required to disclose every debt. That includes debts to family members and friends. And if you try to pay off friends or family members in the middle of a bankruptcy, you can be seen as showing favoritism to a creditor, or committing bankruptcy fraud. This mistake can lead to a case dismissal, or criminal charges.
By promising to reaffirm the debt after the bankruptcy, doing so, and then repaying it, you can avoid trouble with people you care about.
To protect a co-signer.
Family members and friends may not lend you money directly when they co-sign, but they are guaranteeing a debt. If you discharge the debt in bankruptcy the lender’s going to turn to them to get it paid.
This is, in fact, exactly what co-signing is for. But most people don’t realize that, or really think about it. They don’t realize co-signers end up on the hook for the primary borrower’s debt about 75% of the time. And because creditors tend to wait before turning to the co-signer, the co-signer’s credit is often trashed by the time they realize anything’s wrong.
Reaffirming a co-signed debt serves the same purpose as reaffirming a debt owed to family members and friends. It preserves the relationship (as long as you can pay).
To hold on to property.
If you’re caught up on missed payments you may wish to reaffirm a house or a car debt. You should always make sure you can afford the payments before you do this.
In some cases, it’s not worth it. Reaffirming a debt to save the family home might be wise. Reaffirming an expensive car loan might not be. You can always get a new car loan after bankruptcy, or save up and pay cash for a solid used car. Much will depend on how badly you need the vehicle to go to work or get the kids from school while the case is in progress.
Of course, you will want to consult with a qualified attorney before making either choice.