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What is Reaffirmation Agreement in Chapter 7 Bankruptcy?

Published on May 5th, 2015

When you file a Chapter 7 bankruptcy case, you must include all of your creditors in the bankruptcy filing regardless of whether you intend to continue paying any of your debts after the bankruptcy case is closed. For example, you must include student loan debt in your bankruptcy case even though it is an unsecured debt that is not eligible for discharge in most cases. Likewise, you must include your car loan even though you will continue paying your car payments once the Chapter 7 case is closed to keep the car. For debts you intend to continue paying after your bankruptcy case is closed, the lender may request that you sign a Reaffirmation Agreement.

How Does The Court Define A Reaffirmation Agreement?

According to the United States Courts, a Reaffirmation Agreement is defined as “An agreement by a Chapter 7 debtor to continue paying a dischargeable debt (such as an auto loan) after the bankruptcy, usually for the purpose of keeping collateral (i.e. the car) that would otherwise be subject to repossession.”

In layman’s terms, a Reaffirmation Agreement is a legal document signed by the debtor and filed with the bankruptcy court confirming that the debtor voluntarily promises to repay a debt that would ordinarily be discharged in the bankruptcy case. Reaffirmation Agreements are typically used for secured debts. The main reason why a creditor would require a Reaffirmation Agreement is that the bankruptcy discharge relieves the debtor’s personal liability for the debt. In other words, the debtor has no legal obligation to repay the loan once the bankruptcy discharge is granted. Even though the secured lien survives the bankruptcy and the creditor can repossess the car if the debtor does not pay the payments, the creditor does not have a contractual relationship with the debtor unless the debtor signs a Reaffirmation Agreement.

What are the Requirements for a Reaffirmation Agreement?

The Bankruptcy Code has specific requirements for Reaffirmation Agreements. A Reaffirmation Agreement must be filed with the court and the court may require a hearing to approve the agreement before it becomes valid. According to the U.S. Trustee’s website, Reaffirmation Agreements must:

  • Be voluntary;
  • Be signed by both parties;
  • Not place too heavy of a financial burden on the debtor or the debtor’s family;
  • Be in the debtor’s best interest; and,
  • Contain a provision that the agreement can be canceled at any time before the court issues the discharge, or within 60 days after the agreement is filed with the court, whichever date is longer.

Should I Sign a Reaffirmation Agreement?

If a debtor wishes to continue paying a secured debt in order to retain the collateral, the creditor may require the debtor to sign a Reaffirmation Agreement. There are several benefits associated with signing a Reaffirmation Agreement; however, several serious disadvantages must be considered before you sign a Reaffirmation Agreement.

For example, if the creditor allows you to continue making payments and keep the collateral without requiring a Reaffirmation Agreement, the creditor may not report your payments to the credit reporting agencies, may not send you billing statements each month, and may not allow you to utilize online services.

On the other hand, if you enter a Reaffirmation Agreement, it is as if the debt was never included in your bankruptcy. The creditor will report your payments to the credit reporting agencies, send you monthly billing statements, and allow you to utilize the same services that other borrowers use. However, if you default on the loan at a later date, you will be responsible for the full amount of the loan as if the bankruptcy never occurred. By not signing a Reaffirmation Agreement, you can walk away at any time without owing another dime.

Signing a Reaffirmation Agreement is a very serious decision that should be made only with the advice and counsel of your bankruptcy attorney.

Contact Our Office for a Consultation with an Experienced Illinois Bankruptcy Attorney

The bankruptcy lawyers of Pioletti Pioletti & Nichols represent individuals who need help solving their debt problems. We assist clients throughout McLean, Woodford, Tazewell, and Peoria counties by providing compassionate, competent legal services. Contact our office at 309-938-4838 to schedule your free consultation.

When you need the assistance of an experienced bankruptcy attorney in central Illinois, call Pioletti Pioletti & Nichols. We are dedicated to providing our clients with exceptional service and support throughout the bankruptcy process.

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