04 May Reaffirmations and the “Ride-Through” in EDNC
On February 22, 2012, the Court issued the In re: Bowden decision. The Bowden decision will affect the way attorneys and their clients approach reaffirmation agreements in the Eastern District of North Carolina (EDNC).
First, a little background. What is a “reaffirmation agreement?” A reaffirmation agreement is a contract between a debtor and a creditor. The debtor agrees to be responsible for that debt as if he never filed bankruptcy on that particular debt. See glossary. By agreeing to personal liability for the debt, if there is a default later on, the debtor can be sued as if the debt never went through bankruptcy.
Though any debt can be reaffirmed, most reaffirmed debts are secured debts–that is, there is collateral associated with the debt. Typically, debts involving cars are reaffirmed because, in many districts, the car creditor takes the view that if the debt is not reaffirmed, the debtor is in default by filing bankruptcy and as soon as certain timelines run, the creditor may seek to repossess the collateral, i.e. car, even though the debtor is making the payments. See link here.
Entering into a reaffirmation agreement is serious business–so much so that, in order for there to be a valid reaffirmation agreement, the bankruptcy court must approve it. The court has an obligation to assure itself that the reaffirmation agreement represents a voluntary act by the debtor and that the reaffirmed debt will not pose an undue hardship on the debtor or his dependents. The bankruptcy court may or may not approve a proposed reaffirmation agreement based on the circumstances presented to it. If the court disapproves the proposed reaffirmation agreement, then the agreement is void.
Another player in the reaffirmation process is the debtor’s attorney. The debtor’s attorney also has a portion of the agreement to consider and possibly sign. The debtor’s attorney must certify that (1) the reaffirmation agreement is a fully informed and voluntary agreement by the debtor; (2) the agreement does not impose an undue hardship on the debtor or his dependents; and (3) that the attorney fully advised the debtor as to the legal effect and consequences of the reaffirmation agreement and default under the agreement. If the attorney does not sign the certification, the court will undertake the inquiry to ensure that the debtor knows what he is getting into.
One of the major consequences of entering into a reaffirmation agreement, particularly with vehicles, is that often the amount owed exceeds what the car is worth. Therefore, if the debtor enters into a reaffirmation agreement for a car and later defaults, the creditor can then repossess the car, sell the car, and if money is still left owing, sue the debtor for the deficiency. Because of this, it is very important not to take any reaffirmations lightly. See here.
Because of the seriousness of a reaffirmation agreement, many attorneys would request that the court disapprove of the reaffirmation agreement as “not in the debtor’s best interests.” If the reaffirmation agreement was disapproved by the court, then the debtor could get a “ride-through” on the debt.
A “ride-through” allows the debtor to maintain the payments on the vehicle yet extinguish the debtor’s personal liability for the debt. As long as the debtor remains current and keeps the vehicle properly insured, the creditor cannot repossess the vehicle just because the debtor’s personal liability was extinguished. A “ride-through” is very important because, for example, the debtor had a car that was worth $15,000 yet he owed $23,000 on the debt. If the debtor did not reaffirm the debt but, after his chapter 7 case, later defaulted, got his car repossessed and sold, the creditor could not sue the debtor for the $8,000.00 deficiency. Naturally, most debtors’ counsel try to achieve a “ride-through” if possible (also a “ride-through is not available in all districts).
With the Bowden decision, if the attorney strikes through any of the certifications required under 11 U.S.C. Â§ 524(c), then the certification on its face is invalid and the reaffirmation agreement is unenforceable. Because the debtor took all the steps required to reaffirm the debt but the attorney, in exercising his or her independent judgment, did not make the required certifications, the debtor will then get the “ride-through” pursuant to In re: Hardiman, 398 B.R. 161 (Bankr. E.D.N.C. 2008) without further judicial action. For different treatment in other district, see here.
In terms of practice, the lawyer can strike through certain portions of the certification submit the reaffirmation agreement to the court. In the EDNC, the court will not schedule a hearing but will disapprove the reaffirmation and the debtor will then be able to “ride-through” the car debt. In other areas, there may be a hearing and/or other outcomes with the agreement. Speak to your attorney, who will be able to guide you in your area.