03 Jun Advice for Creditors on Reaffirmation Agreements
Yes, you read it right. This is about giving creditors advice about reaffirmation agreements. It just might be a first here at Bankruptcy Law Network. But it’s occurred to me that creditors deserve some help from time to time. So why not?
The reaffirmation provisions are hopelessly flawed
Before 2005 reaffirmation was simple. The debtor signed a relatively short form if he wanted to reaffirm a secured debt. The form had plenty of disclosures on it. It worked just fine for over two decades.
And then came the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”). Whoever you hired (yes, you, you did this) to monkey around with section 524 (that’s the Code section dealing with the reaffirmation provisions) was just plain clueless, completely lacking the most basic understanding of consumer bankruptcy law.
The crowning jewel of section 524 is the concept of “undue hardship.” Under the new, 2005 rules, undue hardship is presumed to exist where the debtor’s expenses exceed his income.
Let’s think about that for a minute. We know the following: (1) Reaffirmation only applies to Chapter 7 bankruptcy, (2) debtors which have “disposable income” left over are, generally speaking, expected to file Chapter 13 reorganization plans so they can pay back their creditors, and, therefore, (3) it logically follows that in almost all Chapter 7 cases the debtor’s expenses exceed his income. This is why the debtor is in Chapter 7 in the first place! For example, if a debtor has $5,000 of income and $4,500 of expenses, that debtor won’t be in Chapter 7. He’ll be in Chapter 13 because he can pay his creditors $500 a month. The bottom line here is this: There’s an undue hardship in virtually every Chapter 7 filed!
Rebutting the presumption
This requires the debtor to show (1) that circumstances have changed since filing bankruptcy and that the “undue hardship” no longer exists, or for (2) the attorney to certify that the debtor can make the payments, along with an explanation from the debtor as to how those payments can now be made. Oh, and if the lender is a credit union, none of this matters. I guess consumers don’t need as much protection against credit unions?
Two obvious problems
First, requirement one–that the debtor’s circumstances have changed–just isn’t realistic in the overwhelming majority of cases. How often would any debtor’s income or expenses materially change in the few short weeks between filing and signing the reaffirmation agreement? Pretty much never. It’s just a really dumb idea to even expect it.
Second, many lawyers–myself included–refuse to sign the certification stating: “A presumption of undue hardship has been established with respect to this agreement. In my opinion, however, the debtor is able to make the required payment.” How can I certify that this agreement does not impose an undue hardship on the debtor when the debtor’s expenses exceed his income? Remember, the folks who re-wrote section 524 defined “undue hardship” as a situation where expenses exceed income. As Illinois bankruptcy lawyer Andy Miofsky explains:
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.
So because neither of these two things happen with much frequency, reaffirmation agreements usually don’t get entered. But because the debtor signed the agreement, he’s done everything that’s required of him, and the creditor can’t repossess the collateral–almost always the debtor’s car.
Perhaps the best-known case on this issue is In re Husain, 364 B.R. 211 (Bankr. E.D. Va. 2007). Husain and other cases allow “back door ride through” where the debtor attempts to reaffirm but can’t because the presumption of undue hardship can’t be rebutted, or where the debtor’s attempt to reaffirm is otherwise frustrated. Put simply, because the debtor signed the reaffirmation, he did what the Code requires, and the creditor can’t repossess the collateral.
The result of the ill-fated tinkering with section 524 is that debtors enter into reaffirmation agreements far less frequently and that courts, now being required to approve reaffirmation agreements when not “certified” by the bankruptcy lawyer, almost never approve them.
So what’s a creditor to do? (I was just waiting for you to ask.)
1. Send the debtor’s lawyer a letter explaining that while the bankruptcy discharge will relieve the debtor of liability on the loan, the lien remains. This calls the debtor’s intention to the fact that cars aren’t just given away, and that the lender will repossess the vehicle if payments are not made as required.
2. Repossess the vehicle if the debtor is more than 30 days late. Keep the debtor on a short leash.
3. Quit wasting time sending out these agreements, and quit pestering debtors and their lawyers to get them signed. Most of the time they won’t get entered anyway, so why bother? And if they do and the debtor later defaults, the odds of collecting anything from the debtor–likely jobless at that point–are miniscule.
4. Reassign insolvency staff members dealing with this craziness to more productive uses–modifying loans, for example, thereby lowering losses from needless defaults and repossessions. (We all know if the car is repossessed a huge deficiency will result, and now that the debt is discharged, the creditor will take a huge loss.) If you can’t use staff in this capacity, send them to the mortgage modification department, because those folks lose virtually every piece of paper they ever touch. They could really use some help.
5. Realize that any increased losses from failing to obtain to get the occasional reaffirmation agreement entered will be offset by not needlessly paying employees to waste time with this process. To quote a friend of mine: “I have one expense, and it’s people.” You run a business, and I don’t care if you’re the CEO of Ford Motor Credit or a country lawyer like I am, payroll and employee benefits are your number one expense. There’s just no way that staffing up to deal with the reaffirmation madness is cost-effective.
6. Do NOT repossess a vehicle just because the debtor failed to sign a reaffirmation agreement. That’s just plain stupid and almost always guarantees that you’ll have a loss. (See #2 for how to deal with this situation.) Ford Motor Credit is the most notorious lender with this policy, and it’s a really bad one. My guess on this one is that the guy who decided to rename the Ford Taurus the “Ford 500” got transferred over to finance and had a heavy hand in this policy. See Reaffirmation Agreements: “Let them Eat Steel” (Parts One and Two) on just what a bad idea this is. Any debtors reading this post should read these, too.
7. You’ve got good lobbyists, but make sure they don’t hire the same folks to revise section 524 next time around. For all the money you’ve spent on this legislation, you really deserve better.
Postscript: For debtors wanting a detailed explanation of their rights and obligations regarding this issue, see my four-part post on reaffirmation agreements on the Charleston Bankruptcy Blog by clicking here.
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