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What is a reaffirmation agreement in bankruptcy?

People in Vancouver who are contemplating bankruptcy are often torn between their desire to cancel their debts and to keep certain assets that may have created one of the debts -- the family car, for example. In a Chapter 7 proceeding, the debtor must turn over all assets to the trustee so that the assets can be sold and the cash from the sale used to pay creditors. Thus, the family car may be forfeited in return for canceling the loan that facilitated its purchase. The bankruptcy code contains one mechanism that may help resolve this dilemma -- a reaffirmation agreement.

A reaffirmation agreement is a contract between the debtor and a creditor in which the debtor agrees to continue to make payments on the loan in return for the creditor's agreement to forego repossession of the asset that was purchased with the loan proceeds. The debtor benefits from such an agreement by retaining possession of the asset. The creditor benefits because the debt will not be discharged. Repayment of the debt will be monitored by the court until it has been repaid according to the terms of the reaffirmation agreement. The agreement must be signed by both parties and filed with the court. Both parties must make disclosures concerning the amount that will be repaid, interest that must be paid, the debtor's income and other financial information.

Some creditors may be willing to significantly alter the terms of the original repayment agreement to prevent the debt from being discharged. This concern may prove to be a significant advantage for the debtor, who can use the threat of discharge to persuade the creditor to offer more favorable terms.

Reaffirmation agreements can be complex, and not every debtor understands them. Before entering a reaffirmation agreement, a debtor may wish to ask an attorney to review its terms and provide an opinion on whether signing the agreement is advisable. The debtor must tell the court whether an attorney has been consulted about the reaffirmation agreement.