The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) changed bankruptcy laws and rules more than any previous revisions of the Bankruptcy Code. One important change in bankruptcy law that resulted from BAPCPA was the discontinuance of the “ride-through.” A ride-through was generally accepted by several bankruptcy districts prior to the enactment of BAPCPA; however, now a ride-through is not allowed. Ride-throughs referred to a secured debt – – if a debtor financed collateral, was current when they filed for Chapter 7 bankruptcy relief and continued making payments on or before the due date they could retain the collateral without signing another contract or any other document to reaffirm the debt. After BAPCPA, a debtor wishing to retain collateral must now agree to and sign a Reaffirmation Agreement.
Reaffirmation Agreements in a Chapter 7 bankruptcy are required if a debtor wishes to retain any personal property that secures a purchase money security interest (a loan that financed the purchase of the personal property) – – this does not apply to real estate. Section 521(a)(6) of the Bankruptcy Code requires a debtor to either reaffirm or redeem personal property within 45 days after the First Meeting of Creditors. If a debtor does not enter a reaffirmation agreement or redeem the property within this time, the automatic stay is lifted (the protection provided by bankruptcy that keeps a creditor from repossession property once the case is filed) and the creditor may proceed under state law to repossess the personal property.
For attorneys representing their clients, this change in bankruptcy law has imposed a greater responsibility on them to advise their clients of the dangers of signing a reaffirmation agreement. An attorney advising his client to sign a Reaffirmation Agreement must certify that either the agreement does not pose an undue hardship on the debtor or any dependant of the debtor OR if an undue hardship is created, the attorney believes the debtor is able to make the payments even with the hardship. Considering that, the majority of cases filed under Chapter 7 have a negative budget it is difficult to understand how any debtor would be able to continue making payments to secured creditors without an undue hardship. The attorney is also certifying that he has advised his client of the risks involved with Reaffirmation Agreements. An attorney who strong believes that his client should not enter a reaffirmation agreement is not required to sign a certification and the client may then proceed on their own if they choose. However, all agreements that result in a presumption of undue hardship are required to go before the Court for approval.
The risk a debtor assumes when entering a reaffirmation agreement is that he or she will not be able to make all of the required payments under the agreement. If this should happen, the creditor will repossess the property and may obtain a judgment against the debtor for any remaining balance. This negates the filing of the bankruptcy with regard to this particular debt because the judgment will then be against the debtor and the creditor is allowed to pursue all actions available to them to collect this debt. Many attorneys feel that this is not in the best interest of their clients and, in fact, if the payments are current may advise their clients to wait and see if the creditor forces the matter. If a debtor keeps the payments current after filing for bankruptcy, the creditor may not take any action if a reaffirmation agreement is not signed. However, the risk of repossession is assumed by the debtor if he or she chooses not to sign the reaffirmation agreement.
Until more cases are forced by creditors in state court, it is difficult to tell how state court judges will rule when a debtor is current on all payments but the creditor is demanding possession of the collateral because a reaffirmation agreement has not been signed. Section 521(a)(2) reads in part that if the debtor does not enter a reaffirmation agreement or redeems the property within 45 days “such property shall no longer be property of the estate, and the creditor may take whatever action as to such property as is permitted by applicable nonbankruptcy law”. The questing will then be if the debtor is current what applicable nonbankruptcy law will be relevant.
Melanie Sonnenborn. “Reaffirmation Agreements: Basic Practice Tips and Pitfalls”(ABI Committee News, Volume 6, Number 4, November 2008)
Cornell University Law School