Debtors Beware Reaffirmation Agreements Can Be Hard to Rescind

Debtors Beware Reaffirmation Agreements Can Be Hard to Rescind

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The grounds for setting aside reaffirmation agreements are limited after the time to rescind has expired. Reaffirmation agreements are not favored by bankruptcy courts and are strictly construed based on conventional contract principles.1

Debtor's counsel should generally discourage reaffirmation of unsecured debts.2 Section 524(c) and (d) governs the requirements of reaffirmation agreements and their enforceability ("The rules governing enforcement of reaffirmation agreements are intended to protect debtors from compromising their fresh start by making unwise agreements to repay dischargable debts.").3

Reaffirmation agreements generally constitute a new contract between the chapter 7 debtor and the creditor, are generally construed by their plain language and legally bind the debtors to pay pre-petition debts that would otherwise be discharged.4 Neither party can be compelled to enter into a reaffirmation agreement, and either may condition their approval of the reaffirmation within the law of reasonableness.5 It has also been held that the court cannot issue a rule prohibiting the reaffirmation of unsecured debt.6

The requirements of the reaffirmation agreement are set out in §524(c). A reaffirmation agreement is not subject to court review if the debtor is represented by an attorney during the course of negotiating the agreement. The only time that the court reviews a proposed reaffirmation agreement is when the debtor is not represented by an attorney and when the agreement is based in whole or in part on a consumer debt that is not secured by real property of the debtor.7 The debtor may rescind the agreement prior to discharge or within 60 days after the agreement is filed with the court, whichever occurs later.8

Under what authority may the court set aside the reaffirmation agreement? In view of the fact that the reaffirmation agreement is construed based on contract principles and the parties are free to contract any reasonable language, the courts have been loathe to modify the contract in the absence of a showing of mutual mistake. Upon conclusion of the 60-day time period to rescind the reaffirmation agreement, the agreement becomes legally binding on the debtor to pay pre-petition debts that would otherwise be dischargable, and the bankruptcy court is powerless to provide a remedy after the expiration of the rescission period.9

Changed Financial Circumstances

In the case of In re Curcio, 242 B.R. 192 (Bankr. S.D. Fla. 1999), the court rejected a chapter 7 debtor's request to rescind a reaffirmation agreement when the debtor's financial circumstances had changed after the entry of the agreement and after the finding that it would not impose undue hardship. The court held that the agreement becomes enforceable to the same extent as if the debtor had never filed for bankruptcy relief and that the court was powerless to set aside the agreement. This was in keeping with an earlier Florida decision, In re McCrelass, 141 Br. 223 (Bankr. N.D. Fla., 1992), in which the court held that a reaffirmation agreement could not be rescinded after the time period even though there was a finding, after the expiration of the time to rescind the agreement, that continued performance under the agreement would impose an undue hardship on the debtor.

Mutual Mistake

Generally speaking, the courts will only allow a reaffirmation to be rescinded after the statutory time period when there has been a mutual mistake. This has generally arisen in cases involving the debtor executing a reaffirmation agreement and the subsequent avoidance by the trustee of the secured creditors' lien. The question became whether the debtor continued to be liable under the reaffirmation agreement even though the time to rescind the agreement had expired. In the case of In re Beaton, 211 B.R. 755 (Bankr. N.D. Ala., 1997), the court recognized that the debtor's reaffirmation was based on the mistaken belief of the debtor and mortgagee that the trustee had abandoned the real properties that secured the reaffirmed debts. It was patently obvious that the debtor would not have reaffirmed the debt if it was merely an unsecured claim. Accordingly, the court agreed that the debtors could rescind the reaffirmation agreement on the basis of mutual mistake.10

In the case of In re Ollie, 207 B.R. 586 (Bankr. W.D. Tenn. 1997), the creditor moved to rescind the agreement on the grounds of a unilateral mistake when the creditor's attorney thought that the reaffirmation agreement was related to a non-purchase money account and the creditor indicated that it would not have reaffirmed the purchase money account for less than the full amount owing. The debtor, however, was unaware of the creditor's mistake. The court held that it would only set aside the reaffirmation contract based on the unilateral mistake if enforcement would make the contract unconscionable, which the court declined to find in this case since the debtor received no windfall on account of the mistake.

In a more recent interesting twist, the 9th Circuit BAP in the case of In re Reinertson, 241 B.R. 451 (9th Circuit BAP, 1999), reversed the bankruptcy court's order vacating its approval of the reaffirmation agreement on the grounds that an order can be set aside only for a mistake up to one year after the entry of the order under Rule 60(b) of the Federal Rules of Civil Procedure. Here, the requested relief from the order was more than one year after the entry of the order approving the reaffirmation agreement. However, the 9th Circuit BAP specifically did not address the issue of the authority of the bankruptcy court to rescind the reaffirmation agreement or to limit the enforcement of the reaffirmation agreement, in view of the avoidance of the creditors security interest in the motor vehicle as preferential.


Reaffirmation agreements are interpreted according to ordinary contract terms and, in the absence of mutual mistake, the contracts will be interpreted according to their plain language. Accordingly, attorneys for both debtors and creditors should take great care in the decision to reaffirm a debt and in the wording of such agreements.


1 Matter of Turner, 156 F.3d 713 (7th Cir. 1998). Return to article

2 Matter of Nidiver, 217 B.R. 581 (Bankr. D. Neb. 1998). Return to article

3 Rogers v. Nations Credit Financial Services Corp., 233 B.R. 98, 107 (N.D. Cal. 1999). Return to article

4 In re Saunders, 169 B.R. 192 (Bankr. W.D. Mo. 1994). Return to article

5 In re Jefferson, 144 B.R. 620 (Bankr. D. R.I. 1992). Return to article

6 In re Kinion, 207 F.3d 751 (5th Circuit, 2000). Return to article

7 11 U.S.C. §524(d)(2). Return to article

8 11 U.S.C. §524(c)(4). Return to article

9 In re Saunders, 169 B.R. 192 (Bankr. W.D. Mo. 1994). Return to article

10 See, also, In re Hitt, 137 B.R. 401 (Bankr. D. Mont. 1992); Mandrell v. Ford Motor Credit Co. (In re Mandrell), 50 B.R. 593 (Bankr. M.D. Tenn. 1985); and In re Eassa, 19 B.R. 153 (Bankr. S.D. Ohio. 1982). Return to article

Journal Date: 
Thursday, March 1, 2001