When a debtor reaffirms a dischargeable debt, this means the obligation will survive discharge and continue to be enforceable. [1] To protect debtors from compromising their fresh start by making unwise agreements to reaffirm and repay otherwise dischargeable debts, the Bankruptcy Code sets out lengthy disclosure requirements for reaffirmation agreements. [2]
Once a reaffirmation agreement is signed and filed with the court, many creditors wonder how long they need to wait to transfer the account back to normal servicing status. Section 524 of the Bankruptcy Code contains references to when a reaffirmation agreement is “effective” and when it is “enforceable.” Since the case law shines scant light on the distinction between these two terms, the focus must be on the statutory language itself.
When Is a Reaffirmation Agreement Effective?
Section 524 makes several references to when a reaffirmation agreement becomes effective. When the debtor is represented by an attorney, a reaffirmation agreement becomes effective upon filing with the court, unless the agreement states it is an undue hardship (e.g., the debtor’s monthly expenses exceed monthly income). In the case of an undue hardship on the face of the reaffirmation agreement, if the debtor is represented by counsel, the debtor’s attorney must sign a certification of no undue hardship. [3] The court may schedule a hearing and question the debtor about their ability to repay the debt, and whether an undue hardship exists.
When the debtor is not represented by an attorney, the court must hold a hearing to consider the undue-hardship issue, and the reaffirmation agreement will not become effective until the court enters an order of approval. [4] There is an exception, however: When the reaffirmation agreement relates to a consumer debt secured by real property, no hearing or court approval is required to give effect to entry of the agreement. [5]
When Is a Reaffirmation Agreement Enforceable?
Under § 524(c)(4), a reaffirmation agreement is enforceable as long as all of the following occur:
- The agreement is “made” prior to entry of discharge;
- The agreement contains all of the required disclosures set out in § 524(k);
- The agreement is filed with the court, together with an attorney certification that the agreement is fully informed and voluntary, does not impose an undue hardship on the debtor or his/her dependents, and the debtor has been advised of the legal effect and consequences of reaffirmation and subsequent default;
- Where the debtor is not represented by an attorney, a hearing has been held where the court finds that the agreement is in the debtor’s best interest, and that it does not impose an undue hardship on the debtor.
A final requirement to enforce reaffirmation agreements is that the debtor has not moved to timely rescind any such agreement entered on the docket. In this light, a reaffirmation agreement is enforceable if it meets the above requirements and has not been rescinded the later of (1) any time prior to discharge, or (2) 60 days after being filed with the court. The Bankruptcy Code does not clearly require rescission be provided in writing. Creditor attorneys are therefore wise to wait 60 days after a reaffirmation agreement is filed before checking the docket and reinstating a reaffirmed loan into normal servicing.
The few published cases regarding reaffirmation agreement enforcement typically involve a post-discharge debtor who defends a post-discharge lawsuit on the argument that the reaffirmation agreement is invalid. For example, in Nkosi v. Atlanta Postal Credit Union, [6] the debtor argued that the reaffirmation agreement was invalid on account of being unconscionable. The court granted summary judgment to the credit union, finding that there was no evidence that the debtor did not voluntarily reaffirm his debt during the bankruptcy. In doing so, the court noted that there was no evidence that the reaffirmation agreement itself was unfair, deceptive or unconscionable; no evidence that the reaffirmed debt imposed an undue hardship on him; and no evidence that the debtor moved to timely rescind the reaffirmation agreement.
In Klein v. Duren Law Offices LLC, [7] the debtors sued their bankruptcy attorneys, alleging malpractice for advising them to enter into a reaffirmation agreement. In an ironic twist, it was not the debtor arguing that the reaffirmation was invalid; rather, the attorneys argued that the reaffirmation agreement was invalid in an attempt to evade a malpractice claim on the theory that the reaffirmation was invalid for counsel’s failure to sign Part D. The appellate court agreed with the attorneys, ruling that to be enforceable, a reaffirmation agreement must strictly comply with all applicable provisions of § 524. [8]
Whereas the creditor party typically seeks to enforce a reaffirmed loan upon default, the onus is generally on the creditor to ensure that any filed reaffirmation agreement strictly adheres to the requirements of § 524. At the same time, any attorney who represents a debtor must also be mindful of, and advise their clients of, the specific rescission dates in their case.
[1] 11 U.S.C. § 524.
[2] 11 U.S.C. § 524(k).
[3] 11 U.S.C. § 524(k)(3)(J)(i)6.
[4] 11 U.S.C. § 524(k)(3)(J)(i)7.
[5] Id.
[6] 494 S.E.2d 566 (Ga. 1997).
[7] 2014 WI App 45, 353 Wis. 2d 554, 846 N.W.2d 34.
[8] See In re Grisham, 436 B.R. 896, 907 (Bankr. N.D. Tex. 2010) (“[T]here are lengthy disclosures and other requirements in Section 524 that must be adhered to for a reaffirmation agreement to be enforceable.”); Golladay, 391 B.R. at 421 (“In order for a reaffirmation agreement to be valid and enforceable, it must strictly comply with all of the requirements set forth in § 524(c).”); see also Lumby v. Lumby, 116 Wis. 2d 347, 351, 341 N.W.2d 725 (Ct. App. 1983) (concluding that “reaffirmation ... not performed in accordance with 11 U.S.C.S. secs. 524 and 727(a)(10) ... is invalid”).