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.