Judge, Please Deny My Reaffirmation Agreement.

Counsel: Your Honor, debtor presents a reaffirmation agreement signed by all parties and prays this Honorable Court deny the reaffirmation in its entirety.

Judge: What’s that you say, counsel? You want me to deny your client’s reaffirmation?

Counsel: Yes your Honor.

Don’t be shocked to hear the above dialogue play out in a court near you. There is a new procedure afoot to avoid the issue of whether an attorney should sign a reaffirmation agreement. A requirement of the 2005 bankruptcy reform act imposes a duty on an attorney to certify that the reaffirmation agreement does not impose an undue hardship on the debtor, or if it does present undue hardship, that circumstances exist that permit the debtor to overcome the hardship. Because of this certification requirement, attorneys across the country often refuse to sign reaffirmation agreements on the basis that they are not in a position to determine whether the debtor can make the future payments, and therefore do not want to assume liability for certifying the ability to repay a debt. The act does not require an attorney sign the agreement, but if the attorney does sign, then the signature must include the certification.

Reaffirmation agreements must be approved by the Court or the agreement is void. Agreements signed by an attorney indicate the debtor is represented during the negotiation of the agreement. These agreements do not require a Court hearing for approval. When an attorney does not sign the agreement, the Court must hold a hearing to consider approving an agreement involving an unrepresented debtor. A direct effect of the reform act is an increase in the number of these reaffirmation hearings, to the consternation of judges and debtors alike.

In the good old days before bankruptcy reform, many car lenders would not require a reaffirmation agreement. If the debtor made car payments on time, the lender serviced the loan in the usual and customary manner. This treatment was referred to as “ride through”.  After the reform act many lenders now insist on receiving a reaffirmation agreement, and absent one, these lenders will repossess a vehicle upon expiration of the automatice stay regardless whether loan payments are current. These lenders enforce the ipso facto default clause of the loan agreement. In short, an ipso facto clause considers the loan in default if a person commits the act of filing bankruptcy.

The new strategy involves a request to deny rather than approve the agreement in an effort to defeat the certification requirement and avoid the ipso facto loan default. This reaffirmation revolution appears to have spawned from a decision in the Western District of Missouri, In re Riggs, 2006 WL 2990218 (Bankr. W.D. Mo. Oct. 12, 2006), that refused to permit repossession of a vehicle merely upon a claimed default under an ipso facto clause in the loan document, and was nurtured in the Bankruptcy Court for the Eastern District of Virginia in the case of In re Husain, 364 BR 211 (B.E.D Va 2007), which followed Riggs and required an actual default such as lack of payment or lack of insurance coverage. Missouri Superlawyer Wendell Sherk discusses these holdings in his blog, Reaffirmation Agreements: Attorney Signatures and Court Approval.

The procedure is simple and is based on the argument that a debtor must merely enter into an agreement to reaffirm a debt in order to retain the benefit of the automatic stay, regardless whether that agreement ultimately receives Court approval. So long as debtor makes all timely payments, these Courts are refusing to enforce ipso facto clauses, and lenders are unable to repossess vehicles.