• Law Office of Christopher R. Chicoine

What Options Does a Debtor Have When Cornered Into Signing a Reaffirmation Agreement?

Updated: Mar 19

This blog aims to educate debtors and their lawyers on how to strategize when a secured creditor demands that the debtor sign a reaffirmation agreement. It won’t explore all options, but it will set forth the rules so that you can know which ones are good, and which are bad.

The issue comes up because debtors are required to timely file a statement of intention with respect to any asset encumbered by a secured creditor’s lien, and then timely carry out that intention. If they don’t, the stay can lift and the debtor can lose certain prized assets. Debtors have 3 statutory options:

  1. redeem – i.e., pay a cash lump sum to the secured creditor in full satisfaction of its lien in an amount equal to the value of the collateral (only available in chapter 7);

  2. surrender – i.e., cease making payments and give return the asset to the secured creditor; or

  3. reaffirm – i.e., keep making payments but waive discharge rights as to the reaffirmed debt (since many financed vehicles are underwater, this is a big deal because it means a future breach may result in loss of a car plus a deficiency judgment).

Debtors often struggle over whether to reaffirm because they want to keep their car but don’t want to risk personal liability if they can’t continue to make payments. Pre-BAPCPA, debtors benefitted from a fourth option known as “retain and pay” or “ride through payments.” Under this option, debtors could choose not to reaffirm but wouldn’t lose their vehicle if they continued payments. If they ceased payments, the lender would take the car back but the debtor would still have the benefit of the discharge and thus, no fear of exposure to a deficiency judgment.

The "Ride Through" Option Today.

Congress caved to the auto finance industry’s lobby efforts in 2005. As a result, the 2005 bankruptcy reform legislation included the abrogation of the “ride through” option via Bankruptcy Code § 521(d). That section provides:

If the debtor fails timely to take the action specified in subsection (a)(6) of this section, or in paragraphs (1) and (2) of section 362(h), with respect to property which a lessor or bailor owns and has leased, rented, or bailed to the debtor or as to which a creditor holds a security interest not otherwise voidable under section 522(f), 544, 545, 547, 548, or 549, nothing in this title shall prevent or limit the operation of a provision in the underlying lease or agreement that has the effect of placing the debtor in default under such lease or agreement by reason of the occurrence, pendency, or existence of a proceeding under this title or the insolvency of the debtor. Nothing in this subsection shall be deemed to justify limiting such a provision in any other circumstance.”

Section 521(d)’s reference to (a)(6) and § 362(h) deals with a debtor’s failure to reaffirm a secured debt. And, those provisions only deal with personal property (thus leaving door open as to ride through option for home mortgages). As such, clauses in a security agreement creating a default due to the mere filing of bankruptcy are enforceable even if the debtor continues to make payments. From a statutory perspective, this all but shuts the door on the “ride through option” pre-BAPCPA.

Some courts have adopted a “modified ride through option”? See In re Donald, 343, B.R. 524 (Bankr. E.D.N.C. 2006). Donald is the leading case for the “modified ride though option” post-BAPCPA. The debtors in Donald, a married couple, owned a 1999 Lexus encumbered by a lien in favor of Coastal Bank. The debtors’ loan agreement contained an ipso facto clause. The debtors filed a chapter 7 petition, and the debtors’ counsel negotiated a reaffirmed agreement for the car with Coastal on essentially the same terms as the original loan. However, the debtors’ counsel did not file an affidavit or declaration stating that he advised the debtors about the consequences of the agreement as discussed in 11 U.S.C. 524(c)(3).

In Donald, Judge Small reviewed the BAPCPA amendments to determine whether the debtors could still exercise the pre-BAPCPA fourth option. Judge Small analyzed the relevant statutory provisions and concluded BAPCPA eliminated the pre-BAPCPA fourth option. Ultimately, Judge Small’s analysis turned to whether the debtors had “entered into” a reaffirmation agreement within the meaning of § 362(h).

As mentioned, the debtors had signed a reaffirmation agreement with the bank, but the debtors’ attorney did not file a declaration or affidavit under §524(c)(3). Judge Small therefore had to decide whether to approve the reaffirmation agreement under section §524(c)(6)(A). The latter provision mandates that a bankruptcy court must consider whether the reaffirmation agreement is 1) an undue burden on the debtors and 2) in the debtors' best interest.

On this point, the debtors argued that disapproval by the court of their reaffirmation agreement is in their best interest. Judge Small rejected the debtor's theory and found that the reaffirmation agreement was not an undue hardship, was in the debtors' best interest, and approved it. However, Judge Small noted quote this does not mean that the debtors’ argument will always fail. Section 524(c) sets forth the requirements that must be met for a reaffirmation agreement to be enforceable. Several of these requirements do not involve the debtor, and whether or not an agreement is enforceable may often be beyond the debtor's control. In particular, Judge Small noted that quote disapproval by the court is beyond the debtor’s control.

“Courts have cited Donald many times, both positively and negatively. Donald is the leading case for the “modified fourth option” position. Basically, Donald reopened the pre-BAPCPA fourth option split in a small category of cases by concluding that BAPCPA contains a modified fourth option, even though Donald did not actually apply the modified fourth option on its facts.” Coastal Credit Union v. Hardiman, 398 B.R. 161 (E.D.N.C. 2008).

Cases that have cited it positively: In re Moustafi, 371 B.R. 434, 438 (Bankr. D. Ariz. 2007); In re Husain, 364 B.R. 211, 219 (Bankr. E.D. Va. 2007); In re Blakeley, 363 B.R. 225,, 229 fn. 7 (Bankr. D. Utah 2007).

Cases that have cited it negatively: In re Steinhaus, 349 B.R. 694, 704-07 (Bankr. D. Idaho 2006); In re Dumont, 383 B.R. 481 (9th Cir. BAP 2008); In re Anderson, 342 B.R. 652 (Bankr. D. Del. 2006).

Shortly after Donald, Judge Small was asked to decide the same issue on similar facts in Coastal v. Hardiman, 398 B.R. 161. On that occasion, Judge Small concluded the reaffirmation agreement signed by the debtors posed an undue hardship and was not in their best interests. Judge Small disapproved the reaffirmation agreement but allowed the debtors to continue to make payments and retain the vehicle with the stay in place, without prejudice to the creditor’s right to repossess the vehicle following a monetary default but with prejudice to its right to seek a deficiency judgment. This “modified fourth option” was affirmed on appeal to the district court. Id.

So How Should Debtors and/or their Lawyers Strategize?

  1. Try to negotiate with secured creditor. Does the secured creditor really want to turn down a stream of money cash payments to take back an underwater and fast-depreciating vehicle? Unless the creditor is Ford Motor Co., the answer is typically no.

  2. What about a cram down? In chapter 13’s a debtor can modify the security agreement by reducing the loan balance to the value of the vehicle and reducing the interest rate to a market rate (vehicle financing interest rates are generally high). Perhaps this is where the debtor may have leverage to negotiate?

  3. What about a “modified ride through option”? This may be an option in certain courts (probably note in the Ninth Circuit given the BAP’s ruling in Dumont, 383 B.R. 481). But, even if it is, as Judge Small noted, whether a debtor may retain and pay is entirely out of a debtor’s control. Debtors must proceed accordingly. See In re Donald, 343 B.R. 524 (Bankr. E.D.N.C. 2006).

  4. Try to force the creditor state under oath whether it will repossess the vehicle if the debtor keeps making payments. This is basically what Judge Mann did in In re Anzaldo, 612 B.R. 205 (Bankr. S.D. Cal. 2020). If the creditor threatens repossession absent a signed reaffirmation but its policy reveals this was a bluff, the debtor (or the trustee) may have an FDCPA claim and perhaps more negotiating leverage.

In Anzaldo, the court issued an order to show cause for Wells Fargo to appear and answer questions under oath since it appeared Wells Fargo was pressuring the debtor to enter into a reaffirmation agreement. Wells Fargo ultimately admitted it would not repossess the debtor’s car, even if she did not sign a reaffirmation agreement, if the debtor continued to make payments.

Therefore, consider written interrogatories to the secured creditor to get them to show their cards under oath. Note, however, it may take weeks to get this information back. In the meantime, the stay will automatically terminate under §§ 362(h), 521(a) within 30-45 days after petition is filed. If this strategy is pursued it must be coupled with a motion under § 521(a) to extend the applicable deadline for the debtor to file its statement of intention. Section 521(a) allows this deadline to be extended for cause. Failure of a creditor to respond to discovery requests would appear to constitute such cause. Id.

There may be several more options. Consider these and perhaps others and evaluate them accordingly based on these rules.

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