This question comes up all the time – either explicitly, or implicitly – during my consultations with prospective and current clients. Because there is no shortage of misinformation on the subject, it’s about time I wrote on it.
I. Secured Debts
In typical consumer bankruptcy practice reaffirmation comes up almost exclusively within the Chapter 7 context, and generally in dealing with secured debt. A secured debt is a debt that is secured by some tangible asset. If the debtor (i.e., the borrower) fails to make the payments, the creditor (i.e., the lender) can repossess the security – i.e., the collateral. For example, a car loan is secured by the car, and a home mortgage is secured by the home.
In order to better understand what is at work here, it helps to know a little more about secured debts. A simple example will suffice to set the stage. When a person takes out a loan to purchase a car, two important things happen.
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