07 Dec Judge Federman Of the Western District Of Missouri Outlines Requirements For A Reaffirmation.
Judge Federman issued a new opinion on November 17, 2008 outlining the requirements for the Court to approve a reaffirmation. A reaffirmation allows a debtor to keep an asset while at the same time the agreement will hold the debtor liable for the debt post discharge.
Judge Federman sets out the requirements of reaffirmation agreements, including parameters for hearings on, and approval of, such agreements, and denies approval of reaffirmation agreements on debtor’s residence because he failed to overcome a presumption of undue hardship under 524(m). In re Schmidt is where the debtor wanted to reaffirm or keep the debts associated with Wells Fargo and secured by his primary residence.
Judge Federman decided that the debtor could not overcome the presumption of undue hardship if he were to allow this debtor keep the debt associated with his primary residence. This is an eye opening case for several reasons. The first is that the Court in the past has not really been overly aggressive with reaffirmations related to a primary residence. The second is that the Judges in Kansas are now looking to Judge Federman’s case to see if they too need to step up the reviews of reaffirmations on the whole. In turn other Judges from across the nation will also review this case.
After Judge Federman reviewed Mr. Schmidt’s schedules he saw that there was a negative budget of $519.91 each month. This means that there is not enough money every month to meet the basic monthly debts of Mr. Schmidt. Therefore if the Judge allows the reaffirmation to be approved than he is allowing the debtor to create an undue hardship for himself. That result would NOT be in the best interest of Mr. Schmidt.
Sometimes the Judges will allow one to reaffirm a debt if the debtor can show how they plan to avoid the undue hardship in a relatively short time of if there is an extraordinary need. However, in this case the debtor could not show how he could overcome the hardship nor could he justify why he needed a house that cost $2000 per month.
What does this mean to the debtor? If your Judge does not allow you to reaffirm a debt secured by your home and a vehicle are you out of luck? No not necessarily. Check with your attorney to see what you state law holds. Many states do not allow a creditor to reposes a vehicle or foreclose on a home if the debtor is current. What this means is, that as long as your account is current and if the Judge does not allow you to reaffirm the debt the creditor may not be able to do anything against you.
The advantage of this strategy is that you keep the account current and the discharge goes through without a reaffirmation you can always surrender the object in the future. So for an example, you have a vehicle with GMAC and your creditor does not give you a reaffirmation or the Court denies the reaffirmation you may have the right to surrender the vehicle at any time. Which is exactly what you can do after keeping the account current for six months after your discharge and your vehicle breaks down. No worries, you can stop payments and not be liable for the debt because it has been discharged. Keep in mind that this is true if and only if you have not signed a reaffirmation agreement and it has not been filed in the Bankruptcy Court.
The downside to this strategy is that you will not get credit for those payments until the account is paid in full. Furthermore, you will not receive monthly statements so you must make sure that the payments are on time. BEFORE YOU MAKE ANY DECISION ON A REAFFIRMATION CONSULT YOUR ATTORNEY FOR LEGAL ADVICE.
Written by Rachel Lynn Foley, Kansas City Missouri Bankruptcy Attorney.