Reaffirmation Agreements: Attorney Signatures and Court Approval

02 Oct Reaffirmation Agreements: Attorney Signatures and Court Approval

When a consumer elects to reaffirm a loan in Chapter 7, can the bankruptcy court approve it if the consumer’s lawyer does not? Different courts have different answers to this question.

Bankruptcy law requires the debtor to reaffirm, redeem or surrender personal property loans within (no later than) 45-days after their creditor meeting. If they choose to reaffirm the debt, the creditor must also consent (which will normally be the case if the terms are unchanged and the loan is current), but the law also requires the lawyer to certify that the debtor understands the terms and options — and that the loan is not an undue hardship for the debtor (or that any hardship is overcome for some specified change of circumstances).

An innovation of the 2005 amendments to bankruptcy law is that if a “presumption of undue hardship” arises in the agreement, the court must also approve the agreement, even if the attorney already has. This is intended to protect the consumer from themselves and it can also be a back-stop for attorneys who feel compelled to sign off on agreements that make them uncomfortable but their clients are confident they can perform.

But what if the lawyer either does not participate in the reaffirmation process or cannot in good conscience sign it? Some courts will go forward to hold a hearing to determine whether the debtors can overcome the undue hardship and therefore the agreement should be approved, as Judge Federman in Western Missouri did. However other judges conclude they cannot proceed further.

Judge Huennekens in the Eastern District of Virginia agreed with Federman that, when a consumer and a creditor enter into a reaffirmation which is not ultimately approved by the court, the consumer should not lose the car unless they subsequently default on payments or insurance (or reasonably maintaining the car). See, In re Husain, 364 B.R. 211 (2007).

In July Huennekens concluded the court is powerless to even review a reaffirmation agreement unless it is countersigned by an attorney (if the debtor had an attorney). He reasoned that the BAPCPA provisions on reaffirmation are clear and the court lacks the power to review such agreements and, in effect, decided the debtor’s lawyer cannot pass the buck to the court to decide the issue.

Judge Huennekens went on to declare that the debtor’s lawyer could not avoid the obligation by excluding negotiation of reaffirmation agreements from their retainer and either not representing the client in those transactions — which would put the ball in the judge’s court (literally and figuratively) — or by formally withdrawing from the case to avoid the duty. See, In re Isom, 07-31469, 2007 WL 2110318 (Bankr.E.D.Va. 2007).

In practical terms, this is disconcerting for consumer lawyers for many reasons. First, reaffirmations are not required in order for the debtor to complete a case and obtain a discharge. And although common, they are not necessarily a core part of obtaining relief for the client. So consumers and their lawyers may wish to limit the attorney’s representation — and fees — by excluding those deals from the representation.

Second, consumer lawyers have a difficult time squaring the duty to advocate the client’s wishes — to keep a car and the loan attached to it even if they don’t seem able to afford it — with their obligation under bankruptcy law to “certify” that repayment is not an undue hardship. It’s a conflict which is nearly impossible to balance perfectly. Signing the certification, even if the agreement must still be approved by a judge, leaves the lawyer exposed to “buyer’s remorse” recriminations from clients who later regret the reaffirmation decision. So while the judge is protected by judicial immunity from the consumer, the attorney is not.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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