Sixth Circuit Addresses Debtors’ Claims Regarding Breach of Reaffirmation Agreement

Through the reaffirmation process, debtors may voluntarily enter into agreements with creditors to repay otherwise-dischargeable debts.[2] However, when a dispute arises as to whether a party has performed its end of the bargain, the question becomes whether the terms of the original agreement or the reaffirmation agreement apply.

The Sixth Circuit recently held in Chandler v. Peoples Bank & Trust Co. of Hazard[3] that if the terms of a reaffirmation agreement do not “specifically differ” from those of the original agreement, then the terms of the original agreement control.[4] While the precedential value of Chandler may be limited because it was not recommended for full-text publication, the opinion still provides useful guidance for attorneys who represent debtors or creditors in reaffirmation agreement negotiations.

In Chandler, the debtors took out a loan with Peoples Bank & Trust Co. of Hazard (“Peoples Bank”) in 2012. The debtors made timely payments on the loan for over a year but missed a payment due July 7, 2013. On July 30, 2013, the debtors filed a petition for relief under chapter 7. The debtors made another payment on Aug. 8, 2013, and Peoples Bank applied this payment to the missed payment due in July.

On Sept. 11, 2013, Peoples Bank and the debtors filed a reaffirmation agreement for the debt with the bankruptcy court. The first payment under the reaffirmation agreement was due on Aug. 7, 2013, but the debtors were under the mistaken impression that the payment they made on Aug. 8 would satisfy the first payment under the agreement. The debtors were unaware that Peoples Bank had applied the Aug. 8 payment to the amount due in July.

The debtors continued to make late payments each month for three years, thinking that their payments were timely. Because the payments were late, Peoples Bank charged late fees and reported the late payments to credit reporting agencies (CRAs). In June 2016, after the loan was paid off entirely, the debtors sent letters to the three major CRAs disputing the reported late payments. The debtors also sent letters to Peoples Bank, challenging the accuracy of the bank’s reports.

In February 2017, the debtors filed a complaint against Peoples Bank in district court, alleging that the bank breached the reaffirmation agreement and violated the Fair Credit Reporting Act (FCRA). The district court dismissed the debtors’ claims with prejudice.

On appeal, the debtors argued that (1) Peoples Bank violated the automatic stay by applying the Aug. 8 payment to a pre-petition debt (i.e., the payment due July 7 under the original agreement), (2) Peoples Bank breached the reaffirmation agreement by applying the Aug. 8 payment to the payment due July 7 instead of the payment due Aug. 7, and (3) Peoples Bank violated the FCRA.

The Sixth Circuit affirmed the decision of the district court. First, the court rejected the debtors’ automatic stay argument because it was raised for the first time on appeal.[5] The court noted that even if the issue had been properly preserved, the Bankruptcy Code does not prevent a debtor from voluntarily repaying any debt,[6] and “‘a secured creditor’s acceptance of voluntary payment does not run afoul of the automatic stay as long as the payments have not been induced improperly.’”[7] Thus, because there were no allegations that Peoples Bank “improperly solicited” the debtors’ payment, there was no violation of the automatic stay.[8]

Second, the court explained that a reaffirmation agreement either “renegotiates or reaffirms” the original debt between the debtor and creditor.[9] Accordingly, if the reaffirmation agreement is different from the original agreement, then the terms of the reaffirmation agreement control. However, if the agreements “do not specifically differ,” the terms of the original agreement control.[10] Either way, a valid reaffirmation agreement will restore a creditor’s rights and allow enforcement of the debt if the debtor defaults.[11]

Under the original agreement, the debtors were required to make 47 equal monthly payments and one “irregular payment” at maturity for all outstanding principal and interest.[12] When the debtors filed their bankruptcy petition, they had made a total of 13 payments, so 35 payments remained. After the debtors made the Aug. 8 payment — which Peoples Bank applied to the missed July 7 payment — only 34 payments remained. The reaffirmation agreement called for 33 equal monthly payments, the first of these payments being due Aug. 7, and one final payment due at maturity for all outstanding principal and interest.

The court held that the reaffirmation agreement essentially adopted the terms of the original agreement, therefore the terms of the original agreement controlled.[13] Further, because the original agreement required the debtors to make a payment on July 7, Peoples Bank did not breach the agreement by applying the payment made on Aug. 8 to the amount due in July. In short, the debtors mistakenly believed that the reaffirmation agreement forgave the payment due in July.[14] Finally, the court rejected the debtors’ arguments that Peoples Bank violated the FCRA because it accurately had reported debtors’ late payments.[15]

The precedential value of the decision in Chandler may be limited, but there are still some important lessons for debtors’ and creditors’ attorneys. First, the opinion makes clear that when the terms of a reaffirmation agreement do not “specifically differ” from those of the original agreement, the original agreement controls. While the court did not set forth a general rule for determining whether terms specifically differ, it is apparent from the opinion that the terms of a reaffirmation agreement do not specifically differ from those of the original agreement when (1) the reaffirmation agreement contains the same number of payments required under the original agreement, and (2) the payments are in the same amount. Second, if the terms of the original agreement control, then (1) a reaffirmation agreement will not excuse a debtor’s obligation to make payments the debtor previously failed to make, and (2) a creditor is free to apply payments to amounts owed under the original agreement without violating the automatic stay or breaching the agreement. These points should be kept in mind when representing clients during reaffirmation negotiations.