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Reaffirmation Agreements: What are they and can they be cancelled?

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When a people file for bankruptcy, they are required to include all debts, regardless of the amount of money owed, to whom it is owed, and regardless whether the property securing the debt is needed for their livelihood. But, what if the debtor wants to keep possession of the property securing the debt? In those circumstances, the debtor can propose to sign a reaffirmation agreement.

What is a Reaffirmation Agreement?

A reaffirmation is a written agreement that a debtor in a Chapter 7 bankruptcy makes with one of its lenders/creditors to repay an existing debt despite that debt being listed in the case. When people file for Chapter 7 bankruptcy, they do so in order to obtain relief from the burden of their debts.

By entering into a reaffirmation agreement, a debtor excludes from discharge that one particular debt and the contractual obligations of the parties continue as to that one debt. The debtor maintains possession of the asset securing the loan (e.g., a car or house), as long as he/she can continue to repay the debt owed on that particular loan per the terms of the reaffirmation agreement.

In order to enter into a reaffirmation agreement, a person must file it with the court within sixty days of the meeting with the trustee (called the “First Meeting of Creditors”). The reaffirmation agreement must be approved by the judge who has the discretion to reject such agreements.

May I Rescind a Reaffirmation Agreement Once it is Signed?

Yes, a reaffirmation agreement may be rescinded (i.e., cancelled) after it is signed. The timeframe within which you may do so, however, is relatively short. Procedures must be followed. Understanding those requirements is critical if you wish to exercise that right and terminate the agreement.

The Right to Rescind

The bankruptcy laws state that a person may rescind a reaffirmation agreement at any time before the bankruptcy court enters a discharge order or before the expiration of the sixty-day period that begins on the date the reaffirmation agreement is filed with the court, whichever occurs later. To rescind a reaffirmation agreement, a person must file notice of rescission with the court and notify the creditor that the reaffirmation agreement is rescinded.

When is the Deadline to Rescind?

As stated above, the law provides a two-pronged deadline to rescind: either before the order of discharge is entered by the court or within sixty days of the reaffirmation agreement being filed with the court.

The court typically enters the order discharging the debts of a debtor in bankruptcy approximately sixty days after the First Meeting of Creditors, which takes place approximately one month after the Chapter 7 case is filed. As reaffirmation agreements typically are filed after the creditors meeting, due to the logistics and timing of coordinating with the creditor, the rescission deadline commonly ends on the sixtieth day after the reaffirmation agreement is filed.

It is up to the debtor to monitor the timing, but debtors often do not know the specific date on which the reaffirmation agreement has been filed. Furthermore, once the agreement is signed and sent to the creditor, many lawyers will presume that the debtor will not change his/her mind.

We strongly encouraged debtors to obtain a copy of the reaffirmation agreement that has been filed with the court and indicates the date and time when that occurred in order to track when that right of rescission expires. Debtors should calendar the rescission deadline and take the time, shortly before it expires, to consider one last time whether you really want to stick with that debt. If so, there is nothing to do. If, on the other hand, you change your mind? Keep reading.

Notice of Rescission

If you do change your mind and want to rescind the reaffirmation agreement, you will need to give the appropriate notice to the creditor and court. If you were represented by an attorney in the bankruptcy case, be sure that your lawyer’s representation remains current and covers reaffirmation-related services.

Many lawyers end their representation at entry of the order of discharge and closure of the case. As previously mentioned, that often occurs before the rescission deadline expires. A debtor should verify with their attorney that they agree to assist and will draft and submit the notice of rescission.

If you did not retain an attorney, you must be sure that you properly notify the creditor and the court. A letter addressed to the creditor, at the address listed in your bankruptcy schedules, should be sent specifying that you are rescinding the reaffirmation agreement. You may wish to mail the notice by certified mail, return receipt requested, to have proof it was received. Once that notice is mailed, you should also file a copy of it with the court, so the case file is documented of the rescission as well.

Why Would I Want to Rescind?

While most debtors who enter into a reaffirmation have no desire to cancel it, circumstances may change after signing such an agreement that make doing so no longer in your best interest.

A change in income could make the debt no longer affordable. The condition of a vehicle may have changed such that costly repairs are beyond your reach. You may have suddenly gained access to a less expensive vehicle and no longer wish to keep the one for which you reaffirmed the loan.

For whatever reason, if you are within the period to rescind the reaffirmation agreement and choose to do so, the power lies in your hands. You do not need a particular reason or any proof to substantiate your decision As the debtor, you have the absolute right to rescind the agreement within the period afforded, and you should make the decision that best meets your needs.

If you need assistance with bankruptcy or debt-related matters, we would be glad to speak with you further about providing assistance. Give us a call at (630) 406-5440 or email [email protected] to get started.