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Requirements for Creating a Reaffirmation AgreementAfter bankruptcy filers discharge their debts, unsecured creditors may lose the ability to seek or enforce repayment. The debtor can voluntarily repay the creditor in order to keep a property but has no contractual obligation to make continued payments. In some cases, the debtor may choose to reaffirm the debt. The debtor signs a new agreement that requires him or her to repay the debt. As an incentive, the creditor may offer to refinance the debt into terms that are more manageable for the debtor. However, courts will not enforce a reaffirmation agreement unless you met the legal requirements in creating it. You could instead be liable for damages to the debtor if the court rules that the agreement violated the bankruptcy discharge injunction.

Deadline

You must meet two deadlines in order to file a reaffirmation agreement with a debtor:

  • The agreement must be filed no later than 60 days after the first meeting of creditors unless the bankruptcy court gives you an extension; and
  • The agreement must be filed before the debts are discharged as part of a bankruptcy.

The deadlines mean that you must discuss and complete the reaffirmation agreement while the bankruptcy case is ongoing. Once a debt has been discharged, you cannot create a new agreement that requires payment of the same debt from the same party. Even if the debtor agrees to reaffirm the debt, a court will likely rule that the contract is unenforceable. However, a third party who was not involved in the bankruptcy could agree to take on the debt.

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Four Ways to Present Reaffirmation Agreements During BankruptcyOffering a reaffirmation agreement to a debtor going through Chapter 7 bankruptcy can allow a secured creditor to receive close to full value on debts for real and personal property. As part of a Chapter 7 debt discharge, a secured creditor normally repossesses properties if a debtor will be unable to repay the loan. However, the creditor most likely cannot hold the debtor liable for any deficiency after resale of the property. With a reaffirmation agreement, the debtor keeps the property as long as he or she can continue making payments. If the debtor defaults, the creditor can repossess the property, and the debtor would be liable for any deficiency after resale. Knowing the risk this may pose their clients, bankruptcy lawyers will discourage debtors from signing reaffirmation agreements. Creditors need to inform debtors of why a reaffirmation agreement may be to their advantage:

  1. Property Importance: Some collateral property during a bankruptcy has greater value to a debtor than others. A debtor may be more eager to hold onto real estate and personal vehicles than luxury items. Thus, debtors will be more receptive to proposals that allow them to retain possession of important properties.
  2. Realistic Plan: A court will reject a reaffirmation agreement that puts an undue burden on the debtor. Debtors must also be current on their debt payments in order to enter an agreement. Creditors should understand whether debtors will have the financial means to make payments after bankruptcy. If a debtor does, the creditor can explain why it is reasonable to reaffirm the debt.
  3. Short-Term Debt: In some situations, the remaining debt on an agreement may be small enough that the debtor could repay it in a year or less. Offering short-term repayment plans that allow them to keep their properties may be more palatable to debtors.
  4. Modifying Loan: The debtor may need an extra incentive in order to reaffirm a debt. The creditor can present an agreement that lowers the burden on the debtor by reducing the monthly payments or interest rates. A better deal may entice a debtor to reaffirm.

Reaching an Agreement

Debtors must state their intention to reaffirm debts before their debts are discharged during Chapter 7 bankruptcy. Though either party can file a reaffirmation agreement, creditors are most often the ones to initiate the discussions. Reaffirmation agreements must be filed within 60 days after the first meeting of creditors. A Chicago creditor’s rights attorney at Walinski & Associates, P.C., can help you negotiate a reaffirmation agreement with your debtor. Schedule a consultation by calling 312-704-0771. 

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