Creditors Beware Tying Reaffirmations to New Credit Can Violate Automatic Stay

Tying approval of a debtor's reaffirmation of mortgage debt to the reaffirmation of
other unsecured debt violates the automatic stay, according to a recent decision in
the First Circuit. In re Jamo, 262 B.R. 159 (1st Cir. BAP
2001). The remedy for that stay violation can be quite painful to the
over-aggressive creditor. Permissible conduct for a creditor seeking to obtain
reaffirmation of a debt has been the subject of several reported opinions.

Reaffirmation and the Automatic Stay

As noted by Thomas E. Ray in this column in March 2001, reaffirmations are
not looked upon favorably by the courts; however once properly agreed to, a
reaffirmation agreement is very difficult to rescind. Reaffirmation agreements arose
in their present form in the Bankruptcy Code of 1978, and their prior history
is set forth in In re Oliver, 99 B.R. 73 (Bankr. W.D. Okla.
1989). "Section 524(c) authorizes a chapter 7 debtor to seek renegotiation
of the terms of the security agreement with the creditor, thereby creating an
alternative method pursuant to which a debtor may attempt to retain possession of
secured collateral." In re Bell, 700 F.2d 1053, 1056 (6th Cir.
1983). This negotiation is a voluntary undertaking by both the debtor and the
creditor, and inter-party communication is a basic element of negotiation. On the
other hand, ß362(a)(6) prohibits "any act to collect, assess or recover a claim
against the debtor that arose before the commencement of the case."

Since a literal interpretation of these Code provisions makes enforcement impractical,
most courts have held that creditors do not violate the automatic stay by attempting
to obtain a reaffirmation agreement. In re Briggs, 143 B.R. 438 (Bankr.
E.D. Mich. 1992). On the other hand, these attempts cannot violate the spirit
of ß362, the purpose of which is to prevent harassment of the debtor. Certainly
illegal or coercive conduct meets the criteria. In re Briggs, supra, discusses the
aspects of "coercion" and whether administrative freezes on accounts, repossession threats
and other actions are violations of the automatic stay. Interestingly, the Briggs

court found nothing improper in the creditor's actions requiring the debtor to reaffirm
both a secured and an unsecured loan before the creditor consents to reaffirmation.

Tying Reaffirmation to Additional Credit

The Seventh Circuit has also analyzed the tension between the automatic stay and
reaffirmation. In re Duke, 79 F.3d 43 (7th Cir. 1996). Agreeing
with a majority of bankruptcy courts, the court noted that a letter to a debtor
offering to reaffirm a pre-petition debt is not a violation of ß362(a)(6). In
the Duke case, the letter from Sears also offered a credit line upon reaffirmation
and sent a copy of the letter addressed to the attorney directly to the debtor. The
Seventh Circuit found the letter not to be inherently coercive by "extending a carrot"
because there was not even a hint of unfavorable action if reaffirmation was not agreed
to. In re Duke at 46. This conclusion was also reached on another "...mere
request to reaffirm the debt, absent additional facts...." Bessette v. AVCO,

240 B.R. 147, 158 (D. R.I. 1999). The means of making the
request may be critical. Direct telephone contact to a debtor represented by counsel
for the purpose of obtaining a reaffirmation has been found sanctionable under
ß362(a)(6). In re Flynn, 143 B.R. 798, 802-803 (Bankr.
D. R.I. 1992).

Tying Reaffirmation to Other Unsecured Debt

Noting all of these decisions and others, the First Circuit in In re Jamo talked
about the freedom of the parties to discuss any contemplated agreement or to decline
to enter into an agreement. While a creditor has no duty to execute a reaffirmation
agreement and may refuse do to so for any lawful reason or even no reason, the
creditor may not violate the debtor's rights. "Refusing to execute a reaffirmation
agreement unless the dischargeable unsecured debt [is] paid is...an act which violates
the statutory rights of the debtor." In re Green, 15 B.R. 75, 78
(Bankr. S.D. Ohio 1981).

The First Circuit agreed and concluded that a creditor's refusal to execute a
reaffirmation agreement unless dischargeable unsecured debt is paid violates the
debtor's statutory rights. In re Jamo, p. 165. The court found that the In
re Briggs analysis did not apply where the creditor is holding the homestead hostage
for reaffirmation of unsecured and unrelated debts. This action went impermissibly
beyond negotiating reaffirmation, and the First Circuit concluded that a willful and
knowing violation of the stay occurred. For that reason, the court upheld the
bankruptcy court decision, which enjoined the creditor from foreclosing on the home
for one year, gave debtors one year to cure defaults and awarded debtor's attorney
fees.

Conclusion

Creditors are entitled to ask the debtor's attorney for reaffirmation in
correspondence copied to the debtor. They can make an offer more attractive by adding
a credit enhancement. Creditors are warned not to use the reaffirmation process to
force the debtor to pay otherwise dischargeable debt by tying it to beneficial secured
debt.