Avoid Losing Your Property With A Reaffirmation Agreement
In times of recession, people easily lose jobs and slide into bankruptcy. If this has happened to you in the middle of a mortgage period, or you pay monthly installments for a car, a viable option would be a reaffirmation agreement.
Why Would I Use a Reaffirmation Agreement?
A reaffirmation agreement is a contract between a debtor and a creditor in which the debtor reassures the creditor he/she can pay off the debt.
When a person declares bankruptcy, he/she does it to eliminate the obligation of paying certain types of debt. The debtor going through bankruptcy who wishes to hold onto an asset, such as a house or a car, uses the reaffirmation agreement.
These contracts are voluntary. If you sign one, you are legally responsible for paying back the money you owe, or the creditor can take your asset.
The agreement contains several pieces of information:
- The amount of the debt you are reaffirming
- Repayment terms
- The annual percentage rate
- Details about the asset
Why Are Reaffirmation Agreements Beneficial?
When a debtor reaffirms a debt, credit reporting agencies note it. They can see that the debtor is making regular payments and consequently improve his/her credit rating. If you do not reaffirm a debt, credit reporting agencies cannot know whether you are paying the installments or not, so you will have a hard time rebuilding your rating after the bankruptcy.
With the reaffirmation agreement, you can keep the property in your possession, which is another benefit.
Do Reaffirmation Agreements Have Drawbacks?
When we talk about drawbacks, two come to mind. The creditor may not accept the reaffirmation agreement. You can suggest it, but a creditor may refuse to do so, although it does not happen often.
Another disadvantage is that you cannot walk away from the reaffirmed debt. If you sign a reaffirmation agreement and face bankruptcy in the future, you’ll have to pay your dues. This debt cannot be dismissed.
When Should I Use A Reaffirmation Agreement?
A reaffirmation agreement is not suitable for every debtor. To decide whether you need it, answer the following questions:
- Do I need to keep the property?
- Can I replace the property with a cheaper one?
- Will I be able to make the required payments?
- Am I behind on payments?
- Can the creditor take my property?
- Is a co-obligor or guarantor responsible for covering the debt?
- Should I do it to improve my credit rating?
Do I Need To Keep the Property?
If you really need the property, you should reaffirm the debt. If it is not a vital piece of property, such as a house you live in, a reaffirmation deal can push you further into financial problems, and you should avoid it.
Can I Replace the Property With a Cheaper One?
Signing a reaffirmation agreement for the debt at a higher interest rate may not be the best idea. Getting a cheaper car or apartment could be a better option.
Will I Be Able To Make the Required Payments?
Once you sign the reaffirmation agreement, you are personally liable for the debt. Unless you are positive you can make the payments on time, do not sign such an agreement. The creditor can repossess your property, and you’ll still owe money. You will have to pay the difference between the amount of the loan you took and the amount of money the creditor got when he/she sold your property.
Am I Behind On Payments?
If you have unpaid installments you can’t keep up with, do not sign a reaffirmation agreement. You will only increase the debt.
Can the Creditor Take My Property?
Losing a property because of debt can happen if the original contract allows it. If your creditor can repossess your assets, the only way to keep them is to sign a reaffirmation agreement.
Is a Co-Obligor or Guarantor Responsible for Covering the Debt?
A co-obligor co-signs the contract and takes over the debt if the debtor is unable to do so. A guarantor is a person who must cover the debt if both the debtor and co-obligor fail to honor the terms of the deal. To avoid making the co-obligor and guarantor pay for your debt, make a reaffirmation agreement.
Should I Sign a Reaffirmation Agreement To Improve My Credit Rating?
If the only reason for signing a reaffirmation agreement is to improve your credit rating, don’t do it. Other ways to do so are:
- Paying bills on time
- Keeping balances low on credit cards
- Reducing the number of active credit cards
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