Written by Charleston Bankruptcy Lawyer, Russell A. DeMott
In parts one, two, and three, I explained secured debt, liability, how the automatic stay comes into play with reaffirmation agreements, and my opinion about whether you should sign a reaffirmation agreement. I left off with dealing with a situation in which you have equity in your car, which I’ll discuss in this final post.
Wait! I Have Equity in My Car!
In that case you may want to sign the reaffirmation agreement and have a hearing on whether you can rebut the presumption of undue hardship. But, you say, I don’t want to be personally liable for this debt! You probably won’t be. Here’s how it works.
Your duty is, at most, to simply enter into the reaffirmation agreement. You sign it and send it back to the lender. There’s a section of the reaffirmation agreement in which you list your income and your expenses. Those are typically taken from your bankruptcy schedules (I for income and J for expenses). If your expenses are greater than your income, there’s a presumption of undue hardship. For example, if your income is $3000 per month, and your expenses are $3200 per month, you’d have an undue hardship.
There’s a section for me to sign certifying that you can make the payments. If I sign it, that may avoid a hearing on the issue. But I never sign it. Why? Because under our new Bankruptcy Code, the creditor may be able to come after me if you can’t make your payments! I would also expose myself to liability from my client if the client eventually lost the car to repossession. The client could essentially blame me for having entered into the reaffirmation agreement (you should have known I couldn’t afford that car! ). So I don’t sign these, and I don’t know any other bankruptcy lawyers who sign them, either.
And Why Does This Help Me?
If you have a presumption of undue hardship–and almost all Chapter 7 filers do–the Bankruptcy Court must hold a hearing on whether you can rebut that presumption. Is short, the court will need to determine, based on evidence presented at that hearing, whether you can afford to make the payments on the vehicle. If the court determines that you haven’t shown you can afford the car–for example because your expenses are lower than they were when you filed or because your income is now higher–the court will not approve the reaffirmation agreement.
And that’s the beauty of it. We don’t really want the reaffirmation agreement to get approved. You only have to sign the reaffirmation, not get it approved. We go to the hearing, ask the judge to approve it, the judge declines it, but the judge also rules that the debtor did his duty and entered into the agreement. Our judges will further rule that since the debtor entered into the agreement, the creditor can’t repossess the vehicle. In legal terms the ipso facto clause–the clause in the contract that says bankruptcy is a term of default–is not operational.
Yes, this is a horrible waste of judicial resources. We have three outstanding bankruptcy judges here in South Carolina, and I hate wasting their time with reaffirmation hearings. It’s also a waste of your time and mine, and it also results in additional attorney fees to cover the hearing. But so long as you sign the reaffirmation agreement, even knowing it will never be entered because your expenses exceed your income, the creditor will have no basis to declare a default in your contract and repossess the vehicle. But remember, you must continue to make timely payments.
But Then There are Credit Unions
If your loan is with a credit union, the presumption of undue hardship doesn’t matter. Neither the debtor nor the attorney needs to sign anything rebutting that presumption, and there is no need to go to court for a hearing. Why? Just because. Credit unions have better lobbyists. It’s yet another bizarre twist in this very bizarre area of law.
What’s important about this is this: if you sign a reaffirmation with a credit union, it will get entered. You can’t rely on the bankruptcy court to deny the reaffirmation because of undue hardship. So think twice about reaffirming on a credit union debt.
Yes. I’m not creative enough to make up a crazier system. I can’t imagine a more idiotic way of dealing with this issue. And what amazes me about this is that the creditors bought our current Bankruptcy Code. Creditors didn’t ask for judicial input, nor did they ask for input from the debtor’s bar or from law professors. And they’ve ended up with a complete mess.
This brings me back to my original approach: just keep paying like clockwork. The creditor–in all likelihood–won’t repossess your car. As I mentioned earlier, (1) they’ll take a huge loss in most instances–shotgun to the foot–and they can’t come to you for the deficiency; and (2) they know the law on reaffirmation agreements is a chaotic mess. They know in South Carolina that debtors can opt for having a reaffirmation hearing, only to have the court deny approval of the reaffirmation agreement with the court telling the creditor it can’t repossess the collateral.
Nationally, there is at least one exception to this rule: Ford Motor Credit. Ford insists on getting reaffirmation agreements and will repossess the vehicle if the reaffirmation agreement is not signed. But I have not seen this in South Carolina.
I’m Sorry This is Such a Mess!
To debtors, I feel bad for you. I’m sorry this is such a mess, even though neither I, nor any other association of debtors’ lawyers had any input into this process. Likewise, don’t blame the bankruptcy judges or law professors. None of us had anything to do with our new Bankruptcy Code and were completely locked out of the legislative process. It was a money talks system that led to the mess we’re in. And ironically, many of the same players who bought our Bankruptcy Code are the ones who caused our near total financial meltdown during the last few years. They regulated to death a class of folks needing help–debtors–and unregulated themselves.