Reaffirmation Agreement Basics in Chapter 7 Bankruptcy

 

By Michael Fuller, Esq.

Introduction
This 101 article discusses basic procedures and deadlines for attorneys wishing to enter reaffirmation agreements in federal Bankruptcy Court. Local rules may vary District to District but should not conflict with the general Code provisions and Federal Rules of Bankruptcy Procedure (FRBP) cited herein.

Reaffirmation agreements are voluntary between debtors and creditors. A secured creditor may insist that a debtor reaffirm in order to maintain possession of collateral. An unsecured creditor may seek reaffirmation in lieu of filing an objection. A debtor may wish to reaffirm a debt for a variety of reasons, including to continue a long-term relationship with a lender or to keep open the possibility of refinancing a particular loan in the future.

1. Filing the Statement of Intent
A debtor shall file a statement of intent before the first meeting of creditors, and shall serve copies on the trustee and any creditor listed in the statement. See FRBP 1007(b)(2); 11 U.S.C. § 521(a)(2)(A) (2006).

The statement of intent shall list all the debtor's secured debts and leases, and state whether debtor intends to surrender the collateral, or, if the debtor intends to maintain possession, whether debtor will redeem or reaffirm. Id.

2. Entering the Reaffirmation Agreement
If a debtor intends to reaffirm a debt, the debtor shall enter a reaffirmation agreement within 30 days after the meeting of creditors. Id. § 521(a)(2)(B).

Typically, after the debtor states their intent to reaffirm, the creditor will draft the reaffirmation agreement and forward it to debtor’s counsel for review.

Failure to timely file the statement of intent and enter a reaffirmation agreement with regard to personal property causes the following to occur: the automatic stay is terminated, the personal property is no longer property of the estate, and the creditor may enforce the original contract terms, including repossession under an ipso facto (default upon filing bankruptcy) clause. See Id.§ 362(h)(1)(A).

However, the stay does not terminate when a creditor refuses to agree to the reaffirmation on the original terms. 11 U.S.C. § 362(h)(1)(B).

The debtor shall not retain personal property secured by an allowed purchase-money security interest if no reaffirmation agreement is entered within 45 days after the meeting of creditors. Id.§ 521(a)(6).
In order for a reaffirmation agreement to be valid, it must be entered prior to the discharge order, contain certain disclosures as required by § 524(k) (already incorporated into the official forms), be filed with the Court, and if applicable, be accompanied by an affidavit or declaration from the debtor's attorney, or a motion for court approval signed by the debtor. Id.§ 524(c).

3. The Attorney Certification or Motion for Court Approval
If a debtor is represented by an attorney during the negotiation of the reaffirmation agreement, the agreement must be accompanied by a signed affidavit or declaration by the attorney. Among other things, the attorney must certify the agreement does not impose an undue hardship on the debtor or the debtor's dependents. Id.§ 524(c)(3).

If a debtor is not represented by an attorney during the negotiation, the debtor must sign a motion for court approval, stating they are not represented by an attorney in connection with the reaffirmation agreement and that the reaffirmation agreement is in their best interest. Id.§ 524(k)(7).

District decisions vary as to whether a debtor may be represented by a bankruptcy attorney for the purposes of filing but "pro se" with regard to representation during the negotiation of a reaffirmation agreement. Compare In re Minardi, 399 B.R. 841, 848–49 (Bankr. N. D. Okla., 2009) (holding debtor's attorney's attempt to limit services to exclude negotiation of reaffirmation agreements an impermissible limitation on representation); and In re Hoffman, 358 B.R. 839, 842 (Bankr. W. D. Va. 2006) (reasoning that although debtors were represented by an attorney in connection with the motion for court approval, the debtors were not represented during the course of negotiation).

4. Filing the Reaffirmation Agreement
After a reaffirmation agreement has been entered between a debtor and creditor, it must be filed, and if applicable, be accompanied by an attorney certification or debtor's motion for court approval. The agreement must be filed no later than 60 days after the meeting of creditors, and must be accompanied by cover sheet OBF #B27.

5. The Discharge Hearing
The Court may set a discharge hearing to determine whether the agreement is in the debtor's best interest and whether it would impose an undue hardship.

Reaffirmation agreements between debtors and credit unions become effective upon filing, so long as debtor's counsel has signed the certification.

6. Rescission
A debtor may rescind a reaffirmation agreement by notifying the creditor within 60 days after the agreement was filed, or the date of the discharge order, which ever occurs later. 11 U.S.C. § 524(c)(4). Copying the Court and the Trustee with the rescission notice is suggested.

Conclusion
The reaffirmation process provides both debtors and creditors the ability to effectively maintain a debt, and often a business relationship, after bankruptcy. However, the decision to reaffirm an otherwise dischargeable debt must be made only after careful consideration of the circumstances.

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