A Chapter 7 bankruptcy may give Maryland residents a release, or discharge, from the obligation to pay most debts. There are circumstances, however, in which you may choose to enter into an agreement to reaffirm your debt in a Chapter 7 proceeding.
A reaffirmation agreement may be available if you have a secured loan and wish to keep the underlying collateral. When you reaffirm an obligation, you continue to make payments, and you remain liable for the entire unpaid loan balance. By continuing to pay the debt, you may own and use the property that is the subject of the reaffirmation agreement.
The risk of this arrangement is that you will no longer get a discharge for the reaffirmed debt. In other words, if you fail to make the payments on the reaffirmed obligation after the bankruptcy court enters a discharge order, the lender can take possession of the collateral. The lender may also pursue a claim against you for the balance of the loan that remains unpaid after applying the value of the foreclosed or repossessed property.
It may seem contradictory to reaffirm debt when the key benefit of Chapter 7 is to get a discharge from most obligations. For this reason, bankruptcy courts impose strict requirements on reaffirmation arrangements:
- You must provide evidence that you have the financial means to pay the reaffirmed obligation.
- The agreement must be in a writing filed with the court.
- The parties must sign the agreement before the court enters a final discharge order.
Reaffirmation has long-lasting implications and requires thoughtful analysis of the potential benefits and pitfalls.