Negotiated Debt Agreements and Discharge

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Some people follow all of the right advice for managing debt and still end up in over their heads. Because bankruptcy - at least in theory - leaves no stone unturned, agreements negotiated right before filing have the ability to be really harmful to a debtor.

People need to consider realistically how likely bankruptcy is in their future. As other debthelp.com articles discuss, this ability to plan for bankruptcy unfortunately is complicated by some people who try to make money off of others’ financial hardships.

While this means that you must be very careful in negotiating agreements before succumbing to bankruptcy, this is not meant to take away options. In fact, debt negotiation done correctly either can eliminate the need for bankruptcy completely, or can make a Chapter 13 filing work better for you. Chapter 7 comes with the biggest risk for separately negotiated agreements -- it keeps a debt alive that could have been discharged.

A good lawyer will do your paperwork properly. A great lawyer also will provide you with financial planning advice about your debt both during and after bankruptcy. Try to go with the latter. In particular, avoid bankruptcy “mills” – companies with hundreds of clients that all are treated indiscriminately.

Non-Discharged Debts

Non-discharged debts are debts that still are owed after the bankruptcy court discharges a case, and may include taxes, child support, student loans or hidden assets. Such items should be considered individually through separate agreements, so as to be sure that all possibilities of discharging them have been explored (for example, student loans may be discharged if “undue hardship” can be proven), and that a Chapter 13 plan includes a realistic budget of all debts. Since Chapter 13 can take up to five years to be complete, it is essential that these non-dischargeable, big-ticket items are dealt with appropriately. Save yourself years of headaches by having everything in writing.

Some negotiated agreements actually provide a security interest in property. These agreements, especially property settlements in particular, may assume a non-dischargeable nature in court. In the event of financial duress, seek out a lawyer’s advice regarding property and debt agreements, and possibly bankruptcy in the future.

Reaffirmation Agreements

People often file bankruptcy to gain control over their debts and personal affairs. Surprising, many of these people are interested in repaying old debts after they have been discharged, even if they do not have to do so. An agreement of this nature is called a “reaffirmation agreement”, and it may require bankruptcy court approval even if entered into as a matter of conscience. Without approval, there is a chance that the whole bankruptcy process can become a sophisticated “cherry-picking” of creditors: good creditor, bad creditor….

Be aware that after discharging your debts in bankruptcy some creditor(s) may attempt to revive a debt by offering you some type of “deal”. While repaying old debts can be a great way to repair your credit, remember that these discharged debts no longer are considered “debts” at all. Therefore, beware of reaffirmation agreements that have been proposed by creditors. For more information on this topic, see “Creditor Strategies to Collect.”

Conclusions

Carefully calculate the decisions you make between benefit and cost. If you find yourself inevitably slipping into bankruptcy, think twice about negotiating a debt agreement that could backfire when you file. On the other hand, if bankruptcy is something you are determined to avoid, agreements can be a great method of debt management. No matter what, be informed, responsible, and honest, and speak with a lawyer or credit counselor about your financial concerns.