Jernigan on Reaffirmations

I hate reaffirmation agreements. They are way too complicated under BAPCPA and consume way too much time. However, Judge Stacy Jernigan has written a 22 page opinion that explains everything you would ever want to know about reaffirmations. In re Grisham, No. 10-32524 (Bankr. N.D. Tex. 9/7/10). You can find it here. This opinion came to me with the recommendation, "this opinion is so excellent that I felt it would be a shame not to pass it along." I am doing my part by passing it along to this blog's readers.

The Facts

It starts with a debtor and a truck. The Debtor wanted to reaffirm a debt for $17,690.59 which was worth only $16,225 and contained an interest rate of 17.5%. The debtor had 71 months of payments left. His occupation was "retired/unemployed" and his income consisted of social security and unemployment benefits (which were about to expire). He also had about $200,000 in non-dischargeable debt consisting of taxes, alimony and student loans. His net income on Schedules I and J was -$1,091.

Initial Requirements

Judge Jernigan points out that reaffirmations are subject to mandatory requirements without which they are unenforceable.

The first requirement is that the reaffirmation be "made" prior to the granting of the discharge. That means that both parties must have signed it by this date. The reaffirmation met this test. However, if the parties needed more time, the court points out that they can file a motion to defer discharge under rule 4004(c)(2).

The second requirement is that the agreement be "filed" no later than 60 days after the first date set for the first meeting of creditors. Under Rule 4008, the Court has the power to enlarge the time for filing the reaffirmation agreement and may do so without a motion. In fact, the court can enlarge the time period simply by ignoring the fact that the agreement was not timely filed. The agreement in this case met the second test.

Whether to Require a Hearing

The next step in the process is to determine whether there must be a hearing. Judge Jernigan identifies the following cases where a hearing will be set:

1. If the debtor is not represented by counsel during the negotiation of the agreement, there must be a hearing. In order to be approved, the court must find that the agreement does not impose an "undue hardship" on the debtor and is in the debtor's "best interest."

The Court noted with dismay that some attorneys do not assist their clients with reaffirmation agreements.

It should be considered a basic part of chapter 7 debtor-representation that an attorney advise his client as to something as fundamental and significant as a reaffirmation agreement and assist him in negotiation of the same.

Opinion, p. 9 (emphasis in original).

2. There must be a hearing if the presumption of undue hardship is triggered. If the debtor's post-bankruptcy income less other expenses is less than the amount of the debt being reaffirmed, then the presumption is triggered and there must be a hearing. The Court expressed dissatisfaction with attorneys who checked the no presumption box even though the debtor was "barely" negative or who failed to check either box. The Court also noted that if attorneys supplied more information as to how the debtor would be able to afford the payments, it might not be necessary to hold a hearing to determine that the presumption of undue hardship had been rebutted.

Special Cases

The rules are different for Credit Unions and Homesteads.

The presumption of undue hardship does not apply to credit unions. Thus, if the debtor is represented by the counsel, the court must approve the agreement. If the debtor is not represented by counsel, the court must still hold a hearing but need only consider whether the agreement is in the "best interest" of the debtor.

The best interest test does not apply to debts secured by homesteads. Thus, if the debtor is represented by counsel and the math is negative, the court must conduct a hearing limited to undue hardship. If the debtor is not represented by counsel and the math is positive, the court must hold a hearing to give the debtor the statutory warnings, but must approve the agreement.

When to Hold the Hearing

The hearing must be held before the discharge is entered. However, it is slightly more complicated than that. The presumption of undue hardship expires after 60 days. Therefore in a case where the math is negative, the court must conduct a hearing, if at all, within 60 days of when the agreement is filed.

Applying The Test to the Particular Case

In this case, the Debtor and the Creditor timely made the agreement and timely filed it. The Debtor's attorney checked the presumption of undue hardship box so that a hearing was required to be held. The Court held the hearing within 60 days and prior to entry of the discharge. Thus, the only question was whether the presumption of undue hardship was rebutted.

Going back to the original facts discussed above, the Court found that it was an undue hardship for a debtor with negative income which was only going to get worse to reaffirm a debt on a pickup truck with no equity and required 71 more payments at 17.5% interest, especially where the Debtor had large amounts of non-dischargeable debt.

The Conclusion

The Court's Conclusion is worth setting forth in its entirety:

It would be hard for anyone to deny that Section 524 of the Bankruptcy Code—the statute describing the process for reaffirmation of debt—is one of the most unwieldy and cumbersome provisions applicable to consumer bankruptcy cases. Section 524 makes for painful reading. In addition to the items discussed in this opinion, there are lengthy disclosures and other requirements in Section 524 that must be adhered to for a reaffirmation agreement to be enforceable. Moreover, the official form for a reaffirmation agreement has been modified numerous times over the years. Thus, on balance, it is not terribly surprising that compliance with this Code section (and the accompanying rules) is frequently woefully deficient. The court hopes that this Memorandum Opinion provides a resource in the future for those struggling with proper protocol in the area of reaffirmation agreements.

The court also hopes that the thought-process that this court shared, regarding the above-referenced Debtor (and, specifically, why the court would not approve his Reaffirmation Agreement), is useful. Bankruptcy is about “fresh starts” and new beginnings. It is about belt-tightening and shedding past bad habits. Too often, a reaffirmation agreement will reveal that someone just does not comprehend this, and wants to go forward in a manner that will impair his fresh start and perpetuate bad habits from the past.

The court realizes that this is sometimes complicated. In a context in which a debtor does not enter into a reaffirmation agreement during a chapter 7 case regarding a debt-encumbered vehicle, there are probably situations in which a vehicle-lender will repossess the debtor’s vehicle post-discharge, even when the debtor is making regular and timely contractual payments for the car post-discharge—for the simple reason that the debtor did not “reaffirm.” This court has heard intellectual pontificating regarding the legal propriety of such an action by a lender. It would appear that Sections 521(a)(6) and (d), combined with Section 362(h)(1)(A) and (j), may have ended the intellectual debate about this, and may allow such a course of action (at least from a Bankruptcy Code standpoint)—except for, perhaps, in a case in which the debtor entered into a reaffirmation agreement but such agreement was nevertheless not approved by the court. See 11 U.S.C. § 521(a)(6), (d) (2010).7 Thus, the court can understand why a debtor and his counsel might see the wisdom of entering into a reaffirmation agreement, even if they can envision the court may never approve it because of the negative math. Perhaps they imagine that this will help the debtor with the car lender post-discharge, if they at least tried to get the reaffirmation agreement approved with the court. Moreover, perhaps the debtor genuinely needs a car and worries that, absent an attempt at a reaffirmation agreement, he will surely lose the car post-discharge and may not be able to purchase (i.e., obtain financing) for another vehicle in the near future.

Again, the court is not unsympathetic and realizes this can all be very complicated. The court realizes that we are in a world where car lenders may not always act like economically rational animals. And, the court appreciates that car lenders may sometimes have their own economic pressures with which to contend. But, again, the fresh start is the overriding purpose of a chapter 7 bankruptcy case. Many reaffirmation agreements presented to the court are the farthest thing from a “fresh
start” that one could ever imagine. Many times it is time to say “good riddance” to the car. And many times—maybe, just maybe—a car lender will see the wisdom of renegotiating a car loan if reaffirmation is denied.

Accordingly,

IT IS ORDERED that the Reaffirmation Agreement between the Debtor and Capital is disapproved.

Opinion, pp. 19-22 (emphasis added).

This opinion doesn't make me like reaffirmations any more, but it does make the process a bit more clear. I plan to use the language about making a fresh start and ditching bad habits with my clients.

Hat Tip to David DeSoto.

Leif Clark on Reaffirmations: Six Short Clark Opinions on Reaffirmation and What They Mean

Leif Clark is one of the most prolific judges on the bankruptcy bench today. His opinions are generally both scholarly and entertaining to read. However, one adjective which is not usually applied to his opinions is short. Therefore, it is worthy of note that in the past year, Judge Clark his written no fewer than six opinions denying approval of reaffirmation agreements and giving guidance to the parties with regard to the unreaffirmed debt, none of which is longer than three pages.

One line of cases involves Texas home equity loans. In re Brown, No. 08-53373-C (Bankr. W.D. Tex. 4/3/09); In re Porras, No. 07-31488-C (Bankr. W.D. Tex. 3/27/08). As noted by Judge Clark, reaffirmation of a home equity loan is a contradiction in terms, since the Texas Constitution requires home equity loans to be made on a nonrecourse basis.

The subject of the agreement is a home equity loan. Such loans are non-recourse loans, as a matter of Texas law. There is thus no personal liability on the part of the debtor to USAA Federal Savings Bank. USAA's remedies prior to this bankruptcy being filed were limited to recourse to the property in the event of nonpayment and failure to cure. The bankruptcy changed nothing with regard to the nature of this liability. The debtor's discharge has no impact at all on USAA's claim because discharge only affects the debtor's personal liability on a debt, and the debtor never had any personal liability on this debt, even outside bankruptcy. With nothing to discharge, there should be nothing to reaffirm either.

Yet USAA now wants a reaffirmation agreement from the debtor anyway. Why? To what end? Surely not because USAA fears that without such an agreement, its efforts to enforce this debt might contravene the discharge injunction. That is a red herring, if ever there was one. Enforcement of a nonrecourse debt never violates the discharge, as a matter of law.

In re Brown.

Several additional cases concern the situation where the debtors request approval of a reaffirmation but the court denies it for reasons including undue hardship, reconsideration by the debtors and untimeliness. In re Gamboa, No. 08-52028-C (Bankr. W.D. Tex. 1/7/09); In re Davidson, No. 08-51818-C (Bankr. W.D. Tex. 11/21/08); In re Self, No. 08-52687-C (Bankr. W.D. Tex. 11/21/08); In re Morales, No. 07-31453-C (Bankr. W.D. Tex. 3/27/08). In these cases, the Court denied the reaffirmation, but explained where this decision left the parties.

Notwithstanding such denial, the court finds and concludes that the creditor holds a valid and enforceable in rem claim. The creditor is accordingly expressly authorized and permitted to enforce the obligation of the debtors to the creditor as an in rem obligation, such enforcement to include the right to notify the debtor of payments that are or are to become due, the right to demand payment when such payments are not made (either in full or in part), the right to threaten resort to in rem remedies in the event of non-payment, the right to accelerate the indebtedness, the right to give notice of foreclosure sale, and the right to conduct and complete such foreclosure sale, so long as all of the foregoing are conducted in accordance with applicable non-bankruptcy law. None of the foregoing shall ever constitute a violation of the discharge injunction entered in this case pursuant to section 524(a) of title 11.

Further the creditor is authorized and permitted to communicate with the debtor regarding the status of the account, either orally or in writing, and the debtors are authorized and permitted to obtain information from the creditor, either orally or in writing, regarding the status of the account. The creditor is authorized and permitted to afford the debtors the same services with respect to this account as they would enjoy had there been no bankruptcy, including as applicable internet access to the account, the use of electronic funds transfers as a means of payment, the right to receive regular billing statements, and regular escrow updates. The provision of all such services shall never constitute a violation of the discharge injunction entered in this case pursuant to section 524(a) of title 11.

Further, the creditor is authorized and permitted to renegotiate the terms of the indebtedness with the debtors (provided that such renegotiated indebtedness shall remain as an in rem liability of the debtors), to provide payoff amounts for the purposes of any refinancing with a third party, or for purposes of a sale of the underlying property. The provision of any of the foregoing shall never constitute a violation of the discharge injunction entered in this case pursuant to section 524(a) of title 11.

In re Gamboa.

What is happening here? While these brief opinions may never find their way into the published case reports, they show the court taking an active interest in the welfare of the debtors appearing before it. Not all reaffirmation agreements should be approved. The Code prohibits the Bankruptcy Court from approving an agreement where it would constitute an undue hardship or it is not timely submitted. However, rather than simply denying the agreements and leaving the parties to figure out the consequences, Judge Clark has spelled out what it means to have an ongoing in rem obligation. While his missives may constitute advisory opinions, they are useful in that they may reassure lenders that it is okay to continue to communicate with their borrowers. More importantly, they undermine a lender's ability to retaliate against a debtor who has not reaffirmed a debt by freezing them out post-discharge.

This issue recently came up in one of my cases. A debtor had received his discharge some five years earlier. The lender changed servicers around the time of the discharge and no reaffirmation agreement was ever tendered to the debtors. The debtors continued to make their payments and ultimately refinanced the debt. When they sought to purchase a new property, the underwriters for the prospective lender could not understand how a debtor had continued to make payments on a discharged debt. As a result, they did not want to credit that payment history. I was able to provide an explanation of how bankruptcy works with a copy of the Gamboa opinion to show that I was not just making it up. Hopefully, the underwriters will read and comprehend the opinion.