Reaffirmation agreements are appearing more frequently on courts' dockets because of changes implemented by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). This piece discusses the post-BAPCPA increase in the number of reaffirmation agreements being filed with the court, provides (from the perspective of chambers) basic guidance in completing these agreements and highlights some of the difficulties they can present to attorneys representing debtors.
Post-BAPCPA Increase in Reaffirmations
Under §521(a)(6),[1] which was added by BAPCPA, a debtor under chapter 7 shall not retain possession of personal property for which a creditor has an allowed purchase money security interest unless the debtor, within 45 days after the first creditors' meeting, enters into a reaffirmation agreement or redeems the property pursuant to §722. If the debtor fails to reaffirm or redeem the debt, the automatic stay under §362(a) lifts and the creditor is free to exercise its rights under nonbankruptcy law, including the right to repossess. BAPCPA clearly has made reaffirmation agreements a larger and unavoidable part of chapter 7 bankruptcy practice.[2]
Required Court Review of Reaffirmation Agreements
Reaffirmation agreements are governed primarily by §524. BAPCPA amended §524 extensively, requiring greater disclosure by creditors to debtors in relation to such agreements, placing a greater amount of responsibility at the feet of debtors' counsel, and requiring more intensive scrutiny by the court.[3] Section 524(m)(1) states in relevant part that a reaffirmation agreement is presumed to create an undue hardship if the information required on Part D of the agreement reveals that the total of a debtor's monthly expenses plus the amount required to reaffirm the debt is greater than the debtor's monthly income. If the presumption of undue hardship arises, the agreement must be reviewed by the bankruptcy court.
Evaluation and Completing a Reaffirmation Agreement
The reaffirmation process usually is initiated by a creditor sending a reaffirmation agreement to debtor's counsel. A form of the agreement that reflects Code requirements is Official Bankruptcy Form 240A (model form). While use of the model form is not required, it is advisable. For debtor's counsel, a properly completed reaffirmation agreement using the model form provides reassurance that the debtor is receiving the intended protections of the Code; for creditor's counsel, using the model form makes it much more likely that a reaffirmation agreement will pass muster with the courts and will be enforceable. If a debtor is represented by an attorney, the attorney must complete the certification in Part C. The debtor must complete the Debtor's Statement (Part D).
Upon receiving a proposed reaffirmation agreement, the first step for debtor's counsel is to evaluate the reaffirmation and determine whether it is in his client's best interest and whether the client can make the required payments. Questions an attorney may ask himself, and his client, as part of this is evaluation include:
- Is the agreement correctly filled out by the creditor, including a detailed description of the collateral and the required disclosures?
- Who is asking for the reaffirmation (which creditor)?
- Which collateral is involved?
- Have the terms of the original contract been altered in the reaffirmation agreement?
- What, if any, are the alternatives to reaffirmation?
- What are the consequences of reaffirming vs. not reaffirming?
- What are the benefits/costs to the client of reaffirming?
- Can the debtor afford the payments under the agreement?
- Has the debtor's income or expenses changed since Schedules I and J were completed?
- Does the debtor need to make changes in his income or expenses to be able to afford the reaffirmation, and is he willing and able to do so?
- Is the debtor current in his payments?
Counsel should explain the agreement and its consequences to his client and provide the client with his expert opinion as to whether the agreement is in the client's best interests. This may be a moment where counsel needs to be the reality check on a debtor's finances. Honest discussion of what a debtor can really afford and what he really needs versus what he wants is crucial to properly handling a reaffirmation and, ultimately, representing the client in a way that the bankruptcy is, indeed, a fresh start. Committing to an unaffordable reaffirmation is a grave error; the debtor is exposed to the risk of losing the collateral in the event of default and being left with a deficiency judgment.
If the debtor and debtor's counsel agree that the reaffirmation agreement is in the debtor's best interests and is affordable, then debtor's counsel will contact the creditor so that the agreement can be finalized and filed. If the debtor wishes to pursue a reaffirmation that his counsel thinks is unadvisable and/or unaffordable, the situation becomes more difficult. This scenario is best discussed in a review of Parts C and D of the model form.
In Part D, the debtor must list his current income and expenses, not including the proposed reaffirmation payment, and the amount remaining after expenses are deducted from income. If there is not enough money left to make the reaffirmation payment, then a presumption of undue hardship is established, which usually triggers a court hearing. The presumption may be overcome if the debtor can explain satisfactorily how he can make a payment when his reported income and expenses do not reflect adequate funds to do so. The explanation should not be aspirational, but rather should be based on current, objective affordability that is somehow not captured in the reported budget information. Such an explanation is extremely rare.
In Part C, the attorney is asked to select one of two provisions and attest to his agreement with his signature. Option one reads: "I hereby certify that (1) this agreement represents a fully informed and voluntary agreement by the debtor; (2) this agreement does not impose an undue hardship on the debtor or any dependent of the debtor; and (3) I have fully advised the debtor of the legal effect and consequences of this agreement and any default under this agreement." Option two reads: "[Check box, if applicable and the creditor is not a Credit Union.] 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."
If counsel believes that the reaffirmation agreement is in the client's best interest and the client's income and expenses reflect available money for the payment, then the attorney selects the first provision. If counsel determines that the reaffirmation agreement is in the client's best interest and, despite a finding of undue hardship, determines that the client can afford the required payments, then the attorney should select the second provision. This situation usually occurs because a third party, such as a relative, has offered to make the payments. Counsel should try to get the third party's agreement to pay in writing. If the third party is not legally bound and stops assisting the debtor, the debtor may fail at the reaffirmation, resulting in the loss of the collateral and liability for any deficiency judgment. Courts tend to look skeptically at third-party promises that are not legally binding. The attorney's certification that a debtor is able to make a reaffirmation payment must be taken very seriously by the attorney, as an attorney who certifies that the debtor can make the payment when this is not actually so could be liable to the creditor for what the debtor owes [4].
If counsel believes that the reaffirmation is not in the client's best interest and/or is not affordable, then he should not sign the certification. Hopefully, counsel can explain his reasoning to his client and persuade the client not to pursue an ill-advised reaffirmation. But the client may proceed with the reaffirmation despite his attorney's advice to the contrary. Seeing that the debtor's attorney has not completed the certification, the court will likely set a hearing, at which the attorney and client should both appear to set forth their positions. Clearly, this puts a strain on the attorney/client relationship.
The Hearing Process
BAPCPA provides, under §524(m)(1), that courts "review" all reaffirmation agreements in which a presumption of undue hardship arises. The Code does not define "review." The typical practice of bankruptcy courts is to set a hearing on a reaffirmation agreement in which (1) there is an unrebutted presumption of undue hardship; (2) the debtor is pro se or (3) the debtor's counsel has not completed the attorney certification, through practices can vary.
In a post-BAPCPA world, reaffirmation agreements have assumed a more prominent role in chapter 7 cases. While the law and practice in this area, as in many areas affected by BAPCPA, is still evolving, it is certain that reaffirmation agreements now require increased time and attention from attorneys, debtors, creditors and courts. Bankruptcy attorneys on both sides of the aisle are well advised to devote the necessary resources to reaffirmation agreements, since poor choices or mistakes can undo the fresh start that bankruptcy is designed to provide or render an agreement unenforceable, and possibly lead to attorney liability. Properly utilized model forms and honest communication with clients and the courts will go a long way to avoiding most pitfalls.
1. Note that §521(a)(6) applies to personal property and not to real property.
2. Prior to BAPCPA, the Second, Third, Fourth, Ninth and Tenth Circuits recognized an alternative to reaffirmation and redemption, commonly referred to as ride-through. A ride-through allowed a debtor who was not in default to continue simply to make periodic payments according to the contract, as if the bankruptcy had never occurred. The debtor was able to retain the collateral and reserve the option of discharging the balance on the contract if the collateral was later repossessed by the lender.
3. For a very good, concise overview of changing legislative approaches to reaffirmation agreements, including BAPCPA, see Principe, Philip R. "The Reaffirmation Process under BAPCPA: Increasing Judicial Oversight,", ABI Journal Vol. XXVI, No. 1 (February 2007).
4. See Vance, Catherine E and Cooper, Corinne, "Nine Traps and One Slap: Attorney Liability Under the New Bankruptcy Law," Am. Bankr. L.J., Vol. 79 Issue 2 (2005).