11 USC 524(c): What Is a Reaffirmation Agreement?

In a Chapter 7 bankruptcy, a reaffirmation agreement is a formal contract between a debtor and a creditor. This agreement is entirely voluntary and allows a person to continue paying a debt that would otherwise be eliminated by the bankruptcy. By signing, the debtor agrees to waive the discharge for that debt, making it a legally enforceable obligation again. The rules governing these agreements are detailed in Section 524(c) of the U.S. Bankruptcy Code.

The purpose of this arrangement is to re-establish personal liability for a debt in exchange for keeping the property that secures it. This process is an exception to the goal of a Chapter 7 bankruptcy, which is to provide a financial fresh start. The agreement must be made before the court issues the final bankruptcy discharge order to be valid.

Understanding a Reaffirmation Agreement

The main reason a person filing for bankruptcy chooses to sign a reaffirmation agreement is to retain possession of an asset that is collateral for a loan. This most commonly applies to secured debts, such as a car loan or a mortgage on a home. If payments were to stop and the debt were discharged, the creditor would have the right to repossess the property. By reaffirming the debt, the debtor agrees to continue making payments, and the creditor agrees not to repossess the asset as long as the payments are current.

When a debtor reaffirms a debt, their personal liability for that loan is fully reinstated as if the bankruptcy never happened. This legal standing is why the distinction between secured and unsecured debts is important. Secured debts are tied to specific property, making reaffirmation a tool to keep that property.

Unsecured debts, like credit card balances or medical bills, are not tied to any collateral and are very rarely reaffirmed. There is no corresponding asset for the debtor to keep, and doing so would simply negate the benefit of the bankruptcy discharge for that debt.

Required Information and Form Completion

To formalize the agreement, the debtor and creditor must complete and file Director’s Form 2400A, Reaffirmation Documents. The form requires identification of the parties and a summary of the original credit agreement, including the total debt amount, the annual percentage rate (APR), and the proposed repayment terms. If the reaffirmation involves any changes to the original contract, such as a lower interest rate, these new terms must be explicitly described.

Part D of the form is the Debtor’s Statement in Support of Reaffirmation Agreement. This section requires a detailed calculation of the debtor’s financial situation. The debtor must list their total monthly income and subtract their current monthly expenses to demonstrate whether they can afford the payment without financial strain.

This income and expense analysis is tied to a concept known as the “presumption of undue hardship.” This presumption automatically arises if the debtor’s monthly expenses, including the proposed reaffirmed payment, exceed their monthly income. If this occurs, the debtor must provide a written explanation on the form detailing how they will afford the payments.

This could involve contributions from family, a planned reduction in other expenses, or other financial adjustments. Failure to rebut this presumption can lead a court to disapprove the agreement. However, this presumption of undue hardship does not apply if the creditor is a credit union, which can simplify the approval process.

The Court Approval and Filing Process

Once the Reaffirmation Agreement form is completed and signed by both the debtor and the creditor, the path to making it legally effective depends on whether the debtor is represented by an attorney. The completed agreement must be filed with the bankruptcy court before the discharge order is entered.

If the debtor has an attorney, the lawyer must review the agreement and the debtor’s financial circumstances. The attorney determines if the agreement is in the debtor’s best interest and does not impose an undue hardship. If the attorney concludes that the agreement is manageable, they will sign Part C of the form, the “Certification by Debtor’s Attorney,” which affirms the debtor was fully advised of the legal consequences.

Once the attorney signs this certification, the agreement generally becomes effective upon being filed with the court. A court hearing is not required, unless a presumption of undue hardship exists that the attorney cannot certify has been overcome.

Conversely, if the debtor is not represented by an attorney (a “pro se” filer), the process requires direct court oversight. When a pro se debtor files a reaffirmation agreement, the court will automatically schedule a hearing. The judge’s inquiry focuses on ensuring the debtor understands the voluntary nature of the agreement and that it will not impose an undue hardship before it can be approved.

Rights and Obligations After Approval

After a reaffirmation agreement is filed with the court and becomes effective, the debtor retains specific rights while also becoming subject to new legal obligations. The U.S. Bankruptcy Code provides a window for the debtor to reconsider their decision, even after the agreement has been signed. This protection is known as the right of rescission.

The debtor has the right to cancel, or rescind, the reaffirmation agreement for a specific period. This period is the later of two dates: 60 days after the agreement is filed with the court, or the date the court enters the bankruptcy discharge order. To rescind the agreement, the debtor must send a written notice to the creditor stating their decision to cancel. It is also advisable to file a copy of this notice with the bankruptcy court.

If the rescission period passes without the debtor canceling the agreement, the reaffirmation becomes final and legally binding. At this point, the debt is officially excluded from the bankruptcy discharge, and the debtor is obligated to make payments according to the agreement’s terms. Should the debtor later default, the creditor has the full legal right to take collection actions, including repossessing the collateral.

If the sale of the collateral does not cover the full loan balance, the creditor can sue the debtor for the deficiency amount. A deficiency is the difference between the amount owed on the loan and the amount the creditor recovers from selling the repossessed property.