“you may be asked by a creditor to reaffirm a debt. You may want help deciding whether to do so. A creditor is not permitted to coerce you into reaffirming your debts.” 11 U.S.C. § 527(b). Advising clients on whether to reaffirm can be tricky and varies based on local practice and case law. This article delves into issues to be considered in discussing reaffirmation agreements with clients.
A prudent lawyer needs to consider the lender’s policy on “pay and retain,” state consumer protection laws, whether the contract contains an ipso facto clause and the pros and cons of reaffirming. It is not necessarily our duty as bankruptcy lawyers to tell our clients to sign or not to sign a reaffirmation agreement, and ultimately it is the client’s decision whether to reaffirm, but we do need to advise them of the consequences of their decision.
WHAT ARE A DEBTOR’S OBLIGATIONS UNDER THE BANKRUPTCY CODE?
11 U.S.C. § 521(a)(2)(A) requires the debtor to file a statement of intention on debts secured by property of the estate, within 30 days of filing the petition or on or before the date of the meeting of creditors, whichever is earlier. The statement of intention must state whether the debtor intends to retain or surrender the property, and “if applicable,” specify whether the debtor intends to redeem or reaffirm the debt secured by the property.
11 U.S.C. § 521(a)(2)(B) requires the debtor to perform their intention within 30 days after the first date for the meeting of creditors or within such additional time as the court permits (for cause) – and “nothing in subparagraphs (A) and (B) of this paragraph shall alter the debtor’s or the trustee’s rights with regard to such property under this title, except as provided in section 362(h)”.
11 U.S.C. § 521(a)(6) states that individual Chapter 7 debtors shall not retain personal property as to which a creditor has a purchase price claim unless the debtor enters into a reaffirmation agreement within 45 days after the first meeting of creditors (11 U.S.C. § 524) or redeems the property (11 U.S.C. § 722).
11 U.S.C. § 521(a)(6) cautions that if the debtor fails to enter into a reaffirmation agreement within 45 days after the meeting of creditors, the stay terminates with respect to the personal property, the property is no longer property of the estate, and the creditor may take whatever action as to such property as is permitted by applicable nonbankruptcy law.
11 U.S.C. § 521(d) revives the ipso facto clause if the debtor fails to timely take the action specified in §§ 521(a)(6) and 362(h) with respect to secured personal property: “nothing in this title shall prevent or limit the operation of a provision in the underlying lease or agreement that has the effect of placing the debtor in default under such lease or agreement by reason of the occurrence, pendency, or existence of a proceeding under this title or the insolvency of the debtor.”
11 U.S.C. § 362(h)(1): The stay is lifted as to personal property if the debtor (1) fails to timely file a statement indicating intent to either surrender, reaffirm, or redeem personal property § 362(h)(1)(A); or (2) fails to “take timely the action specified” in the timely filed statement of intention, “unless such statement specifies the debtor’s intention to reaffirm such debt on the original contract terms and the creditor refuses to agree to the reaffirmation on such terms.”
REAFFIRMING LOANS SECURED BY REAL PROPERTY
Have you received a call from frantic former client months (or even years) post-discharge telling you “My mortgage company says you should have reaffirmed my mortgage and now they won’t let me refinance! You need to reopen my case to do a reaffirmation!” Did you make a mistake? No. Can you reopen to reaffirm? Generally, no. Many mortgage companies do not ask debtors to reaffirm a mortgage on real estate, some judges will not approve them, and some attorneys would not sign a reaffirmation agreement for real estate. The Bankruptcy Code itself does not appear to contemplate such a reaffirmation (11 U.S.C. §§ 521(a)(6) and 362(h) only refer to personal property).
Still, it may be appropriate in some circumstances for a client to reaffirm a loan secured by real estate: if (1) the client is behind on payments and reaffirming will permit them to bring the loan current, (2) the reaffirmation agreement has more favorable interest or payment terms than the original loan agreement, or (3) the debtor wants to ensure they can refinance during the loan term. But in most other cases, the risk of reaffirming on a mortgage loan with a significant balance outweighs any benefit.
For personal property, if the debtor does not timely file a statement of intention or perform his intentions, the Code says the Chapter 7 debtor cannot retain possession and the stay is terminated. But there is no provision in the Bankruptcy Code that provides similar relief with respect to real property. In fact, “the holder of a claim secured by the real property must take affirmative steps to obtain relief if the debtor has not performed his statement of intention.” In re Elkouby, 561 B.R. 551, 2016 Bankr. LEXIS 617 (Bankr. S.D. Fla. 2016); see also In re Lair, 235 B.R. 1 (Bankr. M.D. La. 1999) (denying motion to reopen to enter reaffirmation on real estate). Reaffirming Loans Secured by Personal Property.
In Chapter 7, debtors with personal property must act timely to avoid termination of the stay. See 11 U.S.C. § 521(a)(6). To illustrate the potential harshness of failing to timely enter into a reaffirmation agreement, consider In re Koufos, 2010 Bankr. LEXIS 3973 (Bankr. C.D. Mass. 2010), where the debtor did not sign the reaffirmation agreement until forty-nine days after the first meeting of creditors. The court found that as a result, “the Debtor’s car ceased to be the property of the estate before the agreement was even signed and American Honda has had the right to enforce its ipso facto clause since that time.”
Generally, ipso facto clauses are not enforceable in bankruptcy. 11 U.S.C. § 365(e)(1). But Section 521(d) carves out an exception for purchase money security interests. A contract’s ipso facto clause only applies if the debtor fails to timely comply with the code’s strict timelines to reaffirm a debt: indicate intentions, enter into a reaffirmation agreement, and file it with the court. If a debtor complies with the reaffirmation requirements, or at least attempts to comply, then the clause will likely not be enforceable as Sections 365(h) and 521(a) have been satisfied.
But Section 521(d) does not create any new substantive rights. It merely terminates the stay for a debtor who does not comply with the reaffirmation requirements. A creditor’s right to repossession is then controlled by nonbankruptcy law. In re Dumont, 581 F.3d 1104 (9th Cir. 2009). If the automatic stay is terminated, the parties must look to state law and the contract to determine if repossession is legal. In Nevada, for example, the filing of a bankruptcy case does not constitute a default under a contract’s ipso facto clause (see, e.g., Nev. Rev. Stat. § 97.304: merely filing bankruptcy does not trigger the ipso facto clause in car loans). In other states, consumer protection laws may prevent repossession if the loan is current, whether or not there is a valid ipso facto clause. (see Mass. Gen. Laws ch. 255B, § 20B(a)). If a debtor fails to comply with §§ 362(h) and 521(a)(2), the automatic stay is terminated, the ipso facto clause can be enforced under § 521(d), and the parties are then free to take whatever action is permitted under the contract and state law. In re Jones, 591 F.3d 308 (4th Cir. 2010).
“Ultimately it is the client’s decision whether to reaffirm, but we do need to advise them of the consequences of their decision.”
In In re Visnicky, 401 B.R. 66, 2009 Bankr. LEXIS 388 (Bankr. D. R.I. 2009), the creditor pursuant to 11 U.S.C. § 362(j) asked the court to confirm that the automatic stay was terminated. The court found that the stay ended because the debtor did not timely enter into the reaffirmation agreement because it was filed 52 days after the meeting of creditors. While the court granted the creditor’s request to terminate the stay, it denied the request seeking authority to repossess and dispose of the vehicle, because state law did not allow it. Id. at 67.
PROS AND CONS OF PAY AND RETAIN VS. REAFFIRMING
RETAIN AND PAY (NO REAFFIRMATION AGREEMENT)
- The debtor’s personal liability on the loan is discharged. If at any point the debtor is unable to pay, the creditor can repossess the vehicle (or other property) but cannot pursue the debtor personally for any deficiency.
- The debtor’s timely payments will be reported positively on their credit report, which will help with credit repair.
- The debtor will receive billing statements and can keep track of payments.
- The debtor should be able to use the lender’s online payment portal.
- The debtor may be able to negotiate better terms: lower interest rate, lower payment, lower the loan balance to the market value of the vehicle/other property (essentially a cram down).
- The creditor will likely not report timely payments on the account to the credit reporting agencies. A debtor may not be able to use their timely payments to rehabilitate credit post-bankruptcy.
- The creditor may not send billing statements. This can be frustrating for debtors as they must independently track all payments.
- Debtors may be denied online access to their accounts. Payments may have to be made by other methods – our recommendation is that debtors use their own bank account’s “bill pay” service so that they can track and document all payments more easily than money orders or checks.
- Comakers may also be denied access to online services if the debt is not reaffirmed, even though the comaker did not file bankruptcy.
- If the debtor becomes unable to pay the loan and the collateral is repossessed, the creditor can pursue the debtor personally for any deficiency because the debt was not discharged. When the debtor has a high-interest, high-balance note, this is particularly ill-advised.
- The debtor may be unable to file a bankruptcy on the deficiency depending on how recent the previous Chapter 7 was filed.
- Reaffirmation Remorse: If the debtor changes their mind after reaffirming they have a short time to rescind the agreement – before discharge or within sixty days after the agreement is filed with the court, whichever is later. 11 U.S.C. § 524(c)(4).
CREDITOR INACTION OR DELAY
Generally, the lender will undertake to draft the agreement because it has knowledge of the contract terms, such as the interest rate, balance, and term. But what if a creditor does not send a reaffirmation agreement, or fails to timely file the completed reaffirmation agreement? Consider In re Nuckoles, 546 B.R. 651 (Bankr. W.D. Va. 2016), where the debtor signed the reaffirmation agreement but the debtor’s lawyer refused to certify that it did not impose an undue hardship on the debtor or any dependent of the debtor. The agreement was returned to the lender to be signed and filed with the court. Because the debtor’s lawyer did not sign the reaffirmation agreement, the lender believed the agreement was not enforceable and, ultimately, refused to sign the agreement or return it to the debtor for filing.
After discharge, relying on the contract’s ipso facto clause, the lender repossessed the vehicle and the debtor followed with an action for sanctions alleging a violation of the discharge injunction. The court found that the debtor signed the agreement, but it was the lender that prevented the debtor from timely bringing the reaffirmation agreement before the court. The court held that because the debtor did everything in her capacity to reaffirm the debt and was current on all her contractual obligations, the debtor had complied with §§ 362(h) and 521(a). The creditor could not invoke its’s ipso facto clause and had thus violated the discharge injunction of § 524 by repossessing the vehicle post-discharge.
PRACTICAL (BUT IMPORTANT) POINTS
Review the reaffirmation agreement carefully to ensure that it matches the loan terms, balance, and monthly payment. Many reaffirmation agreements have incorrect information on them.
Do not sign a reaffirmation that is clearly unaffordable for your client, especially one that involves a predatory lender with a high-interest rate. If your client insists on signing an agreement without your certification, he or she may still do so and it will be up to the judge to approve it.
At least one court ruled that “if the debtor timely files her statement of intentions and executes and files a reaffirmation agreement, she satisfies her obligations under §§ 521(a)(2) and 362(h)(1)”. In re Wright, 622 B.R. 779, 2020 Bankr. LEXIS 2677 (Bankr. D. Or. 2020). The court further found that even though her attorney refused to sign the certification pursuant to § 524(c)(3) and the agreement was, therefore, unenforceable, the court did not have the authority to independently review or approve it. The consequences arising from § 521(d) “are triggered upon a debtor’s failure to enter into the appropriate agreement, not by counsel’s refusal to endorse the agreement or by the court’s inability to approve the agreement.” Id. at 25-26. The creditor could not repossess the vehicle without violating the discharge injunction.
If the 45-day period in § 521(a)(6) in which the debtor must “enter into an agreement” is approaching and no such agreement has been executed, consider filing a motion to enlarge the time to enter into a reaffirmation agreement. Bankr. Rule 9006(b). Because the agreement must be filed no later than 60 days after the first date set for the meeting of creditors, also seek relief extending the agreement filing deadline. Rule 4008(a). Seeking an extension of the filing deadline alone may be moot if the agreement was not timely made. In In re Burroughs, 2020 Bankr. LEXIS 1035 (Bankr. N.D. Ohio 2020), because the reaffirmation agreement was not “made” prior to entry of the debtor’s discharge, the court denied the motion to enlarge because “enlarging the time to file an untimely executed reaffirmation agreement would not cure the agreement’s timeliness defect”. Finally, to avoid any confusion, and depending on your local practice, the motion to enlarge should also include a request to defer entry of the discharge. Rule 4004(c)(2).
“RETAIN AND PAY” (AKA “RIDE-THROUGH”): IS IT EVEN AN OPTION?
Will the lender allow the debtor to “retain and pay” without reaffirming? The answer is often yes, even if you are in a district that would require reaffirmation if the lender insists on it. Do not assume that a lender will allow the debtor to pay and retain the vehicle. If you are not sure, simply ask. Many reaffirmation agreements are emailed to counsel and a quick reply to the lender inquiring about pay and retain usually results in an answer within 24 hours. The lender will let you know if it will allow the debtor to “pay and retain”.
If the lender declines to accept pay and retain, inform your client immediately so that other transportation can be arranged (unless the debtor agrees to accept the lender’s terms and sign the reaffirmation agreement).
If the lender agrees to pay and retain, the lender will usually clarify what that means. Whatever your client ultimately decides, it is a good idea to provide them with the pros and cons, in writing – see sidebar on page 12 for more details.
Although the reaffirmation process may seem straightforward, there are pitfalls even for seasoned attorneys. While the technical aspects of reaffirming a debt fall on the attorney, such as ensuring timely execution and filing of the reaffirmation agreement, the ultimate decision of whether to reaffirm rests with the debtor.
It is the attorney’s duty to ensure that the debtor is prepared to make an informed decision and understands all the possible consequences of reaffirming, or not reaffirming a debt. While the Bankruptcy Code requires that a debtor be given certain legal disclosures associated with executing a reaffirmation agreement, it is the lawyer’s duty to ensure that the debtor is also prepared for the practical impacts of signing an agreement.
- An ipso facto clause is a provision that declares a default in the event of insolvency or bankruptcy. Practically all commercial transactions contain a provision that triggers termination rights whenever the other party files for bankruptcy or experiences an insolvency-related event.
- Unless otherwise indicated, all statutory references are to Title 11 of the United States Code.
- Thus, a debtor who files an intent to reaffirm on the original contract terms but is unable to complete such a reaffirmation due to the creditor’s refusal is not subject to the section. See, e.g., S.D. Fla. Local Rule 1007-3 (giving the debtor the option of filing a motion to compel the lender to perform; compare to giving the creditor the right to compel compliance with the statement of intention. 11 U.S.C. § 521(a)(6)).
- 11 U.S.C. § 521(a)(6) and 362(h).
- Rhode Island (to trigger repossession rights the consumer must be in default on payments, R.I. Gen. L. § 6-51-3); Missouri (must be in default on payments regardless of an ipso facto clause, In re Riggs, 2006 Bankr. LEXIS 2732 (Bankr. W.D. Mo. 2006)); Idaho (to repossess and foreclose on collateral, a debtor must first default on his obligations under the security agreement, In re Steinhaus, 349 B.K. 694 (Bankr. D. Idaho 2006)).
- Because the debtor was represented by counsel, the court found that it did not have the authority to independently review or approve the reaffirmation agreement or determine its enforceability. Wright at 790.
- The authors note that some courts appear to permit reaffirmation agreements made before the granting of the discharge. See § 524(c)(1). Compare with the more specific language in § 521(a)(6)(A) that requires the reaffirmation of purchase price claims for the personal property to be entered into within 45 days after the first meeting of creditors. It seems best to err on the side of the shorter time period unless there is specific case law in your jurisdiction. Also see In re Parker, 372 B.R. 835 (Bankr. W.D. Tex. 2007) (holding that Rule 4008 conflicts with the statute and must be disregarded, so the statutory deadline for filing a reaffirmation agreement is any time before discharge).
- Credit unions are often least likely to allow “retain and pay” due to frequent cross-collateralization of loans; reaffirming could mean paying more than just the balance on the vehicle loan itself.
- This raises the question of whether a lender is bound by such a response. In other words, if a creditor states that retain and pay is allowed, but later changes its mind and attempts to repossess the vehicle, even if the debtor is current, does the debtor have any recourse? Arguably the lender has waived its reliance on the ipso facto clause, but it is best to have something in writing, even if it is an email from the lender.
Original Article : https://www.consumerbankruptcyjournal-digital.com/nacbq/0321_fall_2021/MobilePagedArticle.action?articleId=1726399#articleId1726399