Reaffirmation Of Debts, Redemption of Collateral (Part 2 of 3)

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.

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