What Is A Reaffirmation Agreement In Bankruptcy?

This article will discuss the purpose and permanency of reaffirmation agreements in Illinois bankruptcy. We will answer the following questions:

• What is the purpose of a reaffirmation agreement?
• Is a reaffirmation agreement permanent?
• Is there a deadline for canceling a reaffirmation agreement?
• What is the process for backing out of a reaffirmation agreement?
• Why would I want to rescind a reaffirmation agreement?

As part of the bankruptcy process, you must include all secured, unsecured, priority, and nonpriority debts, regardless of whether the property securing the debt is considered essential for your livelihood; this is the case for both Chapter 7 and Chapter 13 bankruptcy. We're assuming that those filing Chapter 13 are doing so because they can afford the new payment plan and wish to keep some or all of their personal property. But what if you're filing Chapter 7 bankruptcy and you don't want to lose your home or car? Enter the reaffirmation agreement.

What Is the Purpose of a Reaffirmation Agreement?

A reaffirmation agreement is a written contract between the debtor filing Chapter 7 bankruptcy and the lender or creditor. When the debtor signs the reaffirmation agreement, they agree to repay the debt on the loan to keep the property, usually a house or car. A reaffirmation agreement effectively removes the specified property from everything else that will be sold to pay off debt.

When people file Chapter 7 bankruptcy, they are usually doing so because they want to wipe the slate clean and have no debt beyond what can't be discharged in bankruptcy. Most individuals file Chapter 7 because they can't afford the monthly payment plan with Chapter 13. They understand or will understand that losing their house and car might occur as the bankruptcy trustee sells all their assets to pay down creditors. But a reaffirmation allows them to keep the property listed on the agreement, as long as they repay the existing debt and continue to make the monthly payments.

If you decide you want to sign a reaffirmation agreement with your lender, you must file it within sixty days of the First Meeting of Creditors. However, even if your lender agrees to reaffirm your loan, the bankruptcy judge still must approve the contract. Rejection is likely if the judge feels that your post-bankruptcy financials won't satisfy the loan terms.

Is a Reaffirmation Agreement Permanent?

No. You can rescind (cancel) a reaffirmation agreement after it is signed. However, you have to follow a specific procedure to cancel the agreement, the details of which may vary from agreement to agreement. 

Is There a Deadline For Cancelling a Reaffirmation Agreement?

Yes. Current bankruptcy law states that the debtor can rescind a reaffirmation agreement within sixty days of signing the document or any time before the bankruptcy court enters the discharge order, whichever occurs later. The lender also has the right to rescind the agreement. Still, it's highly unusual for a lender to rescind a reaffirmation agreement unless new information comes to light suggesting the debtor is unlikely to pay the new loan.

What Is the Process For Backing Out of a Reaffirmation Agreement?

Debtors seeking to cancel a reaffirmation agreement must file a notice of rescission with the court and notify the lender of the cancellation. As mentioned previously, this notice of rescission must be received by the court within sixty days of signing the agreement or before the court enters the discharge order. 

It is the debtor's responsibility to monitor the timeline of the Chapter 7 bankruptcy process. Debtors should understand that the First Meeting of Creditors usually occurs about one month after the Chapter 7 case is filed. The bankruptcy court enters the discharge order approximately sixty days after the First Meeting of Creditors. Most reaffirmation agreements are filed after the creditors' meeting. To avoid missing a deadline, debtors should retain a copy of the reaffirmation agreement and keep a calendar of the signing date and filing date, along with the date of the creditors' meeting.

Why Would I Want to Rescind a Reaffirmation Agreement?

There are many reasons why a debtor may want to cancel a reaffirmation agreement. Most occur because holding onto the debt is no longer financially feasible; some examples include:

• A sudden decrease in income;
• The sudden change in the condition of the home or vehicle;
• The debtor gains access to a less expensive option; or
• Someone offers to purchase the item.

You don't have to offer a specific reason when canceling a reaffirmation agreement. As long as you follow the proper protocols and file the rescission before the deadline passes, the creditor should post no objections. If you have any questions about reaffirmation agreements and bankruptcy, give us a call at (630) 324-6666 or contact us online to learn more.