Chapter 7 debtors are ‘required’ to reaffirm, redeem, or surrender secured personal property within (at most) a 45-day period after their 341 Meeting or the creditor automatically gets relief from the automatic stay. Normally a reaffirmation must be signed by the debtor, the creditor, and certified to not be an undue hardship (or that the undue hardship can be overcome) for the debtor by the debtor’s attorney. What happens if the attorney does not sign the reaffirmation agreement?
Last year, Judge Federman in the Western District of Missouri confronted this question. The debtor owed almost $5,000 on a 1993 Ford Explorer, on a contract bearing an 18.9% interest rate and chose to reaffirm the obligation. (If that seems like a shocking loan to you, then you either are not a lower income subprime consumer or you have not been paying attention to consumer lending.) The debtor’s lawyer either did not participate in the negotiation of the agreement or, more likely, declined to certify that these onerous terms were not an undue hardship on the client.
W hen the attorney has not signed the agreement, in most courts, the agreement is set for hearing before the judge in order to determine if the court will approve it anyway. In this case, Judge Federman declined to approve the deal because of the onerous terms. But Judge Federman also held that the debtor had done everything the bankruptcy law required of them and therefore the automatic stay would not expire until her case concluded.
More importantly though, he also concluded that Missouri law did not authorize the creditor to repossess the car. He pointed out that Missouri law on consumer loans limits the creditor’s rights significantly by making contract “default” terms enforceable only when the consumer (1) fails to make a payment required, or (2) the “lender’s prospect of payment, performance, or ability to realize upon the collateral is significantly impaired…”
So in order to repossess the car, the lender would have to be prepared to prove their likelihood of being repaid was “significantly impaired.” And since the debtors completing Chapter 7 have usually discharged most or all of their other debt, they were more likely, not less, to repay. Therefore Judge Federman concluded that as long as the debtor maintained the car reasonably well, kept full coverage on it, and continued to make timely payments, the creditor could not repossess the car — even though the reaffirmation was not enforceable. So if the debtor ever reconsidered the decision to keep and pay for the car, she could return it and owe nothing more as well.
For the attorneys, Judge Federman also tried to provide some guidance on his standards for approving an automobile reaffirmation so they could have a standard in determining whether to countersign such agreements themselves. He will review the consumer’s actual ability to repay the debt (Part D of the form) of course and, if they seem to be able to pay now, the query turns to what would happen if they did default: How devastating would the deficiency judgment be?
He concluded this is mostly a function of the balance reaffirmed and the interest rate. Federman concluded his rule of thumb would be interest rates over 10% or balances over $20,000 should be signed off on with great reluctance. Judge Federman was likely assuming that the collateral in such cases is worth at least as much as the reaffirmed balance in most cases, since it seems unlikely he’d encourage debtors or their lawyers to reaffirm $20,000 of debt on $5-10,000 cars so debtors could potentially be paying for a long time after their cars have lost all value.