Can the debtor safely ignore the Bankruptcy Code requirement that
collateral has to reaffirmed or surrendered?
Prior to enactment of the 2005 amendments to the Bankruptcy Code, case
law concerning reaffirmation agreements held that the collateral could
not be repossessed so long as the debtor stays current on the payments,
thus ignoring the nonmonetary default provisions in most contracts that
are automatically triggered by filing bankruptcy. Effectively, this
allowed the debtor to enjoy the "ride thru" without the detriment of
continuing personal liability. However, the provisions of the new law
say that if the debtor fails to perform the required "intention"
with 45 days after the first meeting of creditors, the automatic stay is
terminated with respect to any personal property securing the
obligation and the Code says, "the creditor may take whatever action as
to such property as is permitted under applicable nonbankruptcy law,
(unless the trustee timely seeks and obtains an order from the court
requiring the debtor to surrender the property to the trustee.
Redemption.
Redemption is a procedure in which the debtor seeks an order from
the court allowing the debtor to buy the collateral by paying the
collaterals value to the secured creditor. This can be very advantageous
to the debtor, because the collateral is usually worth a lot less than
the amount of the loan. For example, a car loan might have a $10,000
balance, but the car is actually worth only $5000. Redemption allows the
debtor to buy that collateral for the what it is currently worth. The
"catch" is that the debtor can not force the creditor to accept
installment payments of the redemption price, (the redemption must be
paid in full at the time of redemption), and if the creditor and the
debtor can’t agree on the value of the collateral, then the debtor has
to seek a court determination, (which may require the assistance of an
attorney and can be expensive).
Caveat:
Sometimes the debtor can negotiate with the creditor for better terms,
such as reduced interest and a significant reduction on the balance
owed. This is common when the collateral consists of appliances,
furniture and jewelry. When the collateral is a motor vehicle, creditors
generally require a reaffirmation for the full balance unless the debtor
is going to tender the redemption price in full.
Reaffirmations are disfavored by most
courts. The debtor’s attorney, and frequently
the court itself will not want a debtor to be burdened with a
reaffirmation following the discharge of debts under Chapter 7 because
it impedes the debtor’s "fresh start." For that reason, the
reaffirmation of an unsecured debt, such as a credit card balance or a
medical debt is extremely rare.
Contents of reaffirmation form.
If the debtor does not have an attorney or if the
lawyer will not be involved with the agreement, the proposed
reaffirmation agreement is presented to the court for approval. Most
judges are very reluctant to approve such agreements and will search for
a reason to deny them. The agreement form requires a disclosure of the
current income and expenses of the debtor to show whether the debtor can
actually afford the required payment, and
contains mandatory language warning the
debtor of the consequences of making the agreement. The agreement is
required to disclose certain information, such as the amount of the debt
that is being reaffirmed, the payment terms, interest rate, and the
consequences of a default.
Lawyers representing debtors are
reluctant to sign. One of the reasons for the
reluctance of lawyers is because the debtor’s attorney has to sign a
declaration under penalty of perjury stating that the reaffirmation
would not produce an undue hardship upon the debtor, if the lawyer
represented the debtor in obtaining the agreement. Most attorneys take
their responsibilities very seriously and they are reluctant to sign
such a declaration and saddle their client with such obligations. The
reaffirmation becomes effective if signed by all of the parties and the
debtor’s attorney, and if it is filed with the court prior to discharge,
(unless it is presumed to an undue hardship).
Caveat: Maybe
you shouldn’t be signing something that your own lawyer won’t sign!
Reaffirmation and the presumption of
undue hardship. The reaffirmation is
presumed to be an undue hardship if the debtor’s monthly expenses
exceed the debtor’s monthly income. In that event, the court must
examine the agreement and may disapprove the agreement. The
presumption may be rebutted by written evidence identifying additional
sources of income that will allow the debtor to make the payments called
for in the agreement. Interestingly, the presumption of undue
hardship does not apply where the creditor is a credit union.
Reaffirmation hearing.
In a case where the debtor is not represented by an attorney, Bankruptcy
Code Section 524 requires that the bankruptcy court must hold a hearing
in order to approve any proposed reaffirmation and the bankruptcy court
during that hearing process is going to inquire as to the circumstances
surrounding the obligation and to determine whether or not approving the
reaffirmation would be an undue hardship upon the debtor or any
dependent of the debtor. The court looks at the current income and
expenses of the debtor to see if the debtor can actually afford the
required payment. The Bankruptcy Code states that the court must approve
a reaffirmation as consistent with the debtor’s best interests. Thus, it
appears that the court still holds the discretion to deny a
reaffirmation in cases where the debtor says it is in his best interest
to reaffirm, but the court feels otherwise. Court approval is not
required if the agreement is a reaffirmation of a mortgage securing real
estate.
Rescission of Reaffirmation.
The debtor is entitled to rescind a reaffirmation agreement during the
latter of any time prior to discharge, or within sixty days after making
the agreement, which ever is longer.
Caveat:
Reaffirmation of a debt is often a dangerous pitfall for the debtor,
because some creditors will use subtle forms of coercion and
intimidation to squeeze an unnecessary reaffirmation out of the debtor.
Reaffirmation leaves the debtor "on the hook" to pay a debt which would
have been discharged. Particularly dangerous is any proposed
reaffirmation of a mortgage.
Caveat: Until
this issue is settled in the appellate courts, debtors are taking a big
risk if they attempt to retain possession of collateral, especially
motor vehicles, without reaffirming.
