Reaffirmation Agreements Under BAPCPA and Potential Liability of Bankruptcy Attorneys

By Devin L. Palmer, Esq.
Tuesday January 31, 2006
The Daily Record

As many already know, the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) made numerous changes to the process in which a debtor agrees with a creditor to reaffirm his debts. Reaffirmation is normally encountered when a debtor/bankrupt wishes to ensure that he can keep a secured vehicle and continue to make payments to the secured creditor on a debt that could be discharged in bankruptcy. Predominantly, these revisions deal with additional notices provided by creditors to unwary debtors and affirmations required of the debtor. However, as is often the case with BAPCPA, these changes have also placed potential liability at the feet of unsuspecting bankruptcy attorneys.

While the Bankruptcy Code has always “required” attorneys to execute a certification within the reaffirmation agreement acknowledging that he or she has fully advised the debtor of the legal effect and consequences of the agreement and opining that the arrangement will not impose an undue hardship on the debtor, new section 524(k)(5)(B) of the Code adds a new wrinkle. Basically, if the debtor’s monthly income minus her monthly expenses is less than the scheduled payments of the reaffirmed debt, and the creditor is not a credit union, her attorney must now opine that the debtor is in fact able to make the payments called for under the reaffirmation agreement. Early commentary on this change has speculated that this extra step could lead to serious problems for attorneys, including possible liability to the creditor for what the debtor owes if the debtor defaults on the agreement.

Speculation exists that the result of BAPCPA will be the proliferation of an existing policy among debtor attorneys – representing debtors in the filing of their petition, but not in the negotiating of their reaffirmation agreement. If would, however, certainly be beneficial for attorneys to clearly spell out this arrangement in their now mandated retainer agreement (required by BAPCPA).

An even more widespread practice of debtor attorneys confronting debtors seeking to reaffirm their debt may, however, be coming to an end because of BAPCPA – simply telling clients to continue making payments and not sign the reaffirmation agreement.

While section 521(2) of the Code had always maintained a requirement for debtors to file a statement of intentions regarding the retention or surrender of secured collateral, it did not include any repercussions for a debtor’s failure to file those intentions. In part because of this lack of consequence, courts created what was later deemed as a debtor’s “fourth” or “ride through” option of allowing debtors to maintain property without reaffirming. For example, the Second Circuit in In re Boodrow held that section 521 “does not prevent a bankruptcy court from allowing a debtor who is current on loan obligations to retain the collateral and keep making payments under the original loan agreement.” In re Boodrow, 126 F.3d 43, 53 (2d Cir. 1997). Thus, “notwithstanding section 521, Chapter 7 debtors are [were] not required to reaffirm or redeem a motor vehicle in order to retain it. . .[d]ebtors in these Circuits must simply be current on their loan payments at the time they file the petition, and then keep the payments current.” In re Barse, 301 B.R. 404 (Bankr. W.D.N.Y. 2003), aff’m 309 B.R. 109 (W.D.N.Y. 2004).

Attorneys who were hesitant to encourage a client to reaffirm a debt, let alone execute an attorney’s certification under the pre BAPCPA section 524(c), could therefore take solace with their client in the fact that if the debtor continued to make his payments he would be allowed to maintain his collateral in bankruptcy. This “fourth option” may now be eliminated under BAPCPA, and any further advise by an attorney wrought with danger. Specifically, 11 U.S.C. § 521(a)(6) of the revised Code provides that an individual chapter 7 debtor cannot retain possession of personal property in which a creditor has a purchase money security interest, unless the debtor, not later than 45 days after the first meeting of creditors, either enters into a reaffirmation agreement under § 524(c) or redeems the property under § 722. In addition, pursuant to sections 521(a)(2) and 326(h) the automatic stay will terminate within thirty days of the petition date as to any encumbered collateral if the debtor fails to timely file that statement; and within thirty days after the first date set for the meeting of creditors if the debtor fails to take timely action as specified in the statement of intention. Based on the plain language of BAPCPA, debtors unwittingly current on their payments, but who failed to formally reaffirm on that debt would presumably find their automatic stay associated with that collateral terminated without a motion or even notice from the creditor.

It gets even worse. BAPCPA has also included new section 521(d) of the Code, which some have interpreted as holding that if a debtor fails to properly file a statement of intention or act on that intention (as previously discussed), any ipso facto clause (insolvency provisions or the filing of a bankruptcy case creating a default under the contract) contained in the security agreement associated with that collateral could be enforced by the creditor. For years, creditors have continued to include language in contracts that basically deem the filing of bankruptcy an act of default, but courts in New York have seldom if ever enforced such language. New Section 521(d) may offer court’s little choice but to order these ipso facto clauses enforceable.

Therefore, not only would the non-reaffirming debtor find his property no longer part of the protected bankruptcy estate under sections 521(a)(2) and (a)(6), but even if the debtor has been maintaining his/her monthly payments, pursuant to standard ipso facto contract language and new section 521(d), he/she could also be in default on the contract and the creditor would presumably be allowed to repossess the property. With this in mind, it certainly behooves attorneys in this post-BAPCPA environment who are unwilling to negotiate reaffirmation agreement on behalf of their clients to explain at least these possible ramifications of attempting the “fourth option,” and to provide each debtor the necessary materials to negotiate that agreement on his/her own behalf.