§ 8.8 — Too Many Reaffirmations
Revised: April 20, 2016
The Chapter 7 debtor who proposes numerous reaffirmation agreements is a Chapter 13 candidate. Reaffirmation under 11 U.S.C. § 524 permits an individual debtor—sometimes with a bit of judicial supervision—to forgo discharge of personal liability of selected debts in a bankruptcy case. Most often reaffirmation is used to keep property subject to liens and pay for it after discharge of other debts. But sometimes the debt being reaffirmed is unsecured—for example, a student loan or a cosigned debt. Multiple reaffirmations negate the effect of discharge by leaving the debtor obligated to make the contract payments that contributed to the need for debt relief.
In a Chapter 13 case, the debtor can reaffirm debt,1 but more likely the debtor will use the special powers contained in 11 U.S.C. §§ 1322 and 1325 to modify and restructure debt consistent with the debtor’s budget. Modification of a creditor’s contractual rights is not possible by reaffirmation in a Chapter 7 case without the consent of the creditor.
Many Chapter 7 debtors’ attorneys decline to participate in the negotiation or filing of reaffirmation agreements—especially after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)2—leaving debtors to fend for themselves in a process that is not transparent or simple. BAPCPA made reaffirmations more complicated by requiring many new documents, lots of warnings and many potential traps for all involved.3 Creditors hold all the reaffirmation cards. Creditors can and typically do insist on contract interest rates however onerous, curing of any defaults in payments, attorney fees and other bankruptcy costs as conditions for reaffirmation.
In contrast, Chapter 13 debtors can retain possession of property subject to liens without reaffirming the debt or redeeming the collateral.4 Payments to secured claim holders pursuant to a confirmed Chapter 13 plan are almost always lower than the monthly payments that were required by the original contracts.5 Chapter 13 plans can modify interest rates and monthly payments6 without subjecting the debtor to personal liability and without consent from the creditor. In essence, a Chapter 13 plan can do everything and more than can a reaffirmation agreement, and do it cheaper and better, without loss of discharge and in spite of creditor intransigence. And Chapter 13 debtors can count on the assistance of counsel in the design, negotiation and confirmation of a plan. Using Chapter 13 rather than Chapter 7 with reaffirmations will almost always provide the debtor with a more comfortable budget and still preserve the right to possession and use of creditors’ collateral.
If the debtor is able to make payments pursuant to several reaffirmation agreements, there is increased likelihood that the debtor can propose, confirm and consummate a Chapter 13 plan. A large number of reaffirmations thus becomes another indicator that the Chapter 7 case may be abusive for § 707(b) purposes.7 Any potential Chapter 7 case in which substantial reaffirmations are contemplated and in which the debtor is eligible for Chapter 13 is a case in which counsel must be especially careful to advise the debtor about Chapter 13 before filing a Chapter 7 case.
1 The reaffirmation process under 11 U.S.C. § 524(c) and (d) is applicable in Chapter 13 cases but is rarely seen. A Chapter 13 debtor who desires to continue the terms of a prebankruptcy contract will typically include in the plan a provision to cure the default and maintain payments on that contract during the life of the plan as permitted by 11 U.S.C. § 1322(b)(2), (3) and (5). The reported Chapter 13 cases in which debtors propose to use reaffirmation agreements as part of a plan typically involve misguided efforts by debtors to avoid paying trustee fees or to skirt around a confirmation requirement. See § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise, § 54.6 Compensation on Direct Payments by Debtor, § 74.8 Direct Payment of Secured Claims by Debtor before BAPCPA and § 85.6 Direct Payment of Mortgage or Payment by Trustee. See, e.g., First Bank & Trust v. Gross (In re Reid), 179 B.R. 504, 508–09 (E.D. Tex. Feb. 28, 1995) (Cobb) (Debtor cannot use a “questionable” reaffirmation agreement with a partially secured creditor as a way of avoiding payments through the Chapter 13 trustee. Debtor proposed to pay a partially secured car lender directly pursuant to a reaffirmation agreement while paying Dillard’s, also partially secured, through the Chapter 13 trustee. “[R]eaffirmation agreements should not be used as substitutes for reorganization plans.”), aff’d, 77 F.3d 473 (5th Cir. Dec. 11, 1995) (Table) (per curiam); In re Ford, 179 B.R. 821, 822–24 (Bankr. E.D. Tex. Apr. 5, 1995) (Sharp) (Chapter 13 debtors are not permitted to pay secured claim holders “outside the plan” after negotiating reaffirmation agreements. Debtors proposed to deal with car lenders by entering into “a refinancing agreement called a reaffirmation agreement” that provided for the payment of a principal amount with interest over a term of months paid directly by the debtors “outside the supervision and control of the Chapter 13 Trustee.” “To allow debtors and creditors to pick and choose those claims they will submit to the supervision of the Trustee undermines the integrity of the entire trustee system. . . . By allowing debtors to modify claims outside the plan, the Court would be allowing debtors to avoid the limitations imposed by Congress. Therefore, this Court believes that all claim modifications must be made through the plan subject to the limitations of the Code. This Court, therefore, holds that § 1322(b)(2), read in conjunction with other Code provisions, requires all claims modifications to be made through the Chapter 13 plan subject to the limitations imposed upon such plan by applicable Code provisions. In the present cases, Debtors modified secured claims outside the terms of their Chapter 13 plans, thus violating the requirements of § 1322(b)(2).”). See also In re Cromer, 185 B.R. 1, 4 (Bankr. N.D.N.Y. Nov. 17, 1994) (Gerling) (Plan provision to reaffirm mortgage and pay it directly to the creditor supports allowance of a late-filed proof of claim. Plan provided that first and second mortgages would be “reaffirmed and paid outside the plan.” Beneficial, the holder of the second mortgage, mistakenly believed it did not have to file a proof of claim. After confirmation, stay relief was granted to the first mortgage holder, and a foreclosure sale produced no surplus. Beneficial then late-filed a proof of claim for its deficiency. “According to the terms of the Plan, the Debtors were to reaffirm the debt owed to Beneficial and make payment outside the Plan. In light of the fact that the Debtors are bound by the provisions of the Plan to make payment to Beneficial and the fact that Beneficial, prior to the foreclosure sale, had no reason to object to said treatment, the Court concludes that the equities favor permitting Beneficial to file a late proof of claim.”).
2 Pub. L. No. 109-8, 119 Stat. 23 (2005).
3 See 11 U.S.C. § 524.
4 Redemption under 11 U.S.C. § 722 is discussed in § 8.9 Debtor Cannot Reaffirm or Redeem Property.
5 But see § 75.1 In General: Modification Without § 506, § 75.2 Motor Vehicles and Any Other Thing of Value, § 75.3 Only PMSIs Need Apply, § 75.4 Acquired for Personal Use of Debtor, § 75.5 Surrender in Full Satisfaction? and § 75.6 Procedure and Miscellaneous Hanging-Sentence Issues for discussion of restrictions on modification of some secured debts imposed by BAPCPA—in particular, debts incurred within 910 days of the petition, secured by purchase money lien on a motor vehicle.
6 See § 74.11 The Power to Modify.