The bankruptcy code requires an individual with debts that are secured by property of the estate, such as a car or home, to file a “statement of intentions” with respect to the retention or surrender of such property (See § 521(a)(2)). The debtor is then required to perform these intentions within 45 days after the first date set for the § 341 Meeting of Creditors, meaning if the debtor wishes to retain a car, they must either redeem the property (See § 722), or reaffirm the property (See §524(c)). Federal Bankruptcy Rule 4008 lengthens the applicable time period, stating that “a reaffirmation agreement shall be filed no later than 60 days after the first date set for the meeting of creditors” (See Rule 4008). The reaffirmation agreement can be rescinded, or cancelled, at any time prior to discharge or within 60 days after the agreement is filed with the court, whichever occurs later (See §524(c)(4)).
A Chapter 7 debtor is required to state their intentions with respect to secured property and is required to act on these intentions. A debtor can surrender the property, redeem the property (meaning pay it off at its value versus the amount owed on it), or reaffirm the debt (meaning enter into a new enforceable purchase contract). Because reaffirmation agreements are exceptions to the general bankruptcy discharge, a bankruptcy lawyer must carefully advise a debtor of each option, especially in the context of recent Arizona case law developments.
In Arizona, Local Rule 4008-1, provides that a reaffirmation agreement must conform to Official Form B 240A – Reaffirmation Agreement and if the reaffirmation agreement concerns a secured debt, the security agreement must be attached to the filed agreement. In actuality, most lenders will accept reaffirmation agreements if received prior to the case discharge date. Arizona’s bankruptcy practice of reaffirming on secured debt varies among cars, homes, and general consumer merchandise.
Reaffirmation Agreements and Vehicles
Noncompliance with § 524(c) renders the attempted reaffirmation void.If state law allows repossession of collateral after the end of the Chapter 7 case when there is no reaffirmation, as it appears to do, then the bankruptcy jurisdictions that adopt the “ride through” theory only delay a creditor’s in rem rights. The rights survive Chapter 7 under long-standing bankruptcy jurisprudence. A full analysis of the state law rights in this context is beyond the scope of this article.
Furthermore, the purchase contract typically has an insolvency term, called an ipso facto clause, which in essence provides that if the purchaser files bankruptcy or is otherwise deemed insolvent, such instance serves as a violation of the underlying agreement. The bankruptcy code validates these ipso facto clauses (See § 524(h)). That said, an automobile lender uses the ipso facto term as leverage to force clients to adhere to their obligations to reaffirm or redeem, or they face the possibility of repossession – even if a debtor remains contractually current on their obligation. Additionally, lenders will not report favorable payment automobile payments to the credit bureaus, which is instrumental in re-establishing your credit (See Understanding & Improving Your Credit Blog).
Reaffirmation Agreements & Homes
Debtors are not required to reaffirm or redeem loans on real property (See §§ 521(a)(6) and 524(c)). Debtor attorneys do not sign reaffirmation agreements on real property, even if the bank couches a loan modification therein and it is questionable whether an Arizona bankruptcy judge would even approve such an agreement. These agreements conflict with the bankruptcy code and Arizona’s anti-deficiency laws on residential properties.
Reaffirmation Agreements & Personal Property
Creditors will often issue reaffirmation agreements on financed merchandise, such as computers, jewelry, furniture, etc. Typically, the creditor will provide several demand letters to a debtor’s counsel and then disappear. Some attorney request all documentation substantiating the security interest, including signed documents evidencing the credit agreement, which may dissuade or enable a secured creditor to pursue a reaffirmation request. Other attorneys will simply disregard reaffirmation demands on consumer merchandise, especially when the property has little or no recovery value.
Most, if not all, consumer bankruptcy attorneys disfavor reaffirmation agreements because they limit the broad scope of a debtor’s in personam discharge injunction, and awkwardly place a debtor’s attorney in the precarious position of vouching for a debtor’s loan, i.e., attesting that the reaffirmation agreement does not pose an “undue hardship on the debtor.”