To Reaffirm or Not to Reaffirm ... That is the Question!

[DAE]

The 16th Edition of the NOLO book entitled “How to File for Chapter 7 Bankruptcy” suggests that a debtor wishing to file a reaffirmation agreement on an automobile attempt to negotiate with the creditor to reduce the value of the underlying loan to the replacement value of the vehicle. Specifically, on page 100 of the 16th Edition, NOLO recommends that a debtor not “reaffirm a debt for more than what it would cost you to replace the property.”

However, other sources available online suggest that the 2005 Bankruptcy reforms explicitly say you must reaffirm the entire amount of the debt under a Chapter 7.

For instance, thismatter dot com/money/credit/bankruptcy/chapter-20.htm (and other similar websites) says that “[i]f you purchased the car within 910 days of filing for Chapter 7, then the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 prevents you from redeeming the car by paying only its replacement value. You must continue making payments on the full debt to keep the car.”

It seems to me that the provisions of the BAPCPA that ThisMatter.com and similar sites refer to above is strictly related to Chapter 13 cases and that suggesting that it applies to Chapter 7 cases is an error.

Aside from whether it's good policy to ever reaffirm a debt under Chapter 7, is it the understanding of people here that this provision preventing a negotiated reaffirmation agreement for an amount less than the value of the underlying loan only applies only to Chapter 13 and that a Chapter 7 filer is free to negotiate a lower loan value under a reaffirmation agreement without fearing BAPCPA, Section 1325(a)?

(DAE: Chapter 7, pro se filer)

[AngelinaCat]

This post probably will not help you much, but may give a little perspective. We have a 2004 VW Jetta TDI wagon that we bought new, and paid cash for it in 2003. Don't ask how they figure automobile years--it is weird.

Shortly after that, we took out a loan on the car with our CU trying to catch up with our debts. When we filed BK Dec. 28, 2007, we had about another 10-12 months to go on the loan. The CU required us to reaffirm the loan or we would be dropped. 'Hub had been with this CU for 40+ years and wished to continue doing business with them, so we did.

So this is not exactly an upside-down car note situation. I hope it helps.

[debee]

There's a lot of junk out there.

The 910 rule is in 11 USC 1325 and applies to chapter 13, not chapter 7.

You can redeem a car in chapter 7 (within 910 days of purchasing) and a 722 lender can help strip off the unsecured portion, but apparently they charge really high interest. I haven't had any experience with them, so just sharing what I've read.

[DAE]

Thank you for the responses.

debee,

You can redeem a car in chapter 7 (within 910 days of purchasing) and a 722 lender can help strip off the unsecured portion, but apparently they charge really high interest.

Are you suggesting the only way to strip off the unsecured portion is through a redemption and not a negotiation with the creditor seeking a reaffirmation as NOLO seems to suggest is possible? Or do you think both might be possible?

__________

EDIT: Perhaps I am misreading the "thismatter dot com" posting by reading it to suggest that since a redemption cannot be undertaken for an amount less than the value of the loan, that a reaffirmation also cannot be undertaken for an amount less that the loan value. And perhaps it's all moot since it applies only to Chapter 13.

[debee]

Are you suggesting the only way to strip off the unsecured portion is through a redemption and not a negotiation with the creditor seeking a reaffirmation as NOLO seems to suggest is possible? Or do you think both might be possible?

No, my comments were not meant to establish any kind of limit on what could be done. I think I just glammed onto the redemption concept and ran with it. I think the court would approve any reaffirmation that was in the debtor's interest and stripping off the unsecured portion would certainly qualify. I've spent more time looking at why reaffirmations were denied than the opposite. So, this is just my personal opinion.

[despritfreya]

Clearly “910 rule” does not apply in a 7. However, 722 requires a debtor to pay the lender its "allowed secured claim" for the redemption. For valuation purposes you need to read 506(a)(2) which tells you (as best as Congress can) what the lender's secured claim should be. Typically any reduction in the contract balance will require a redemption. As it relates to reaffirmation agreements very few lenders will reduce the principal but there is nothing stopping a debtor from trying. Wells Fargo routinely reduces the interest rate in an effort to entice the debtor into signing on the dotted line.

Des.

[DAE]

debee,

stripping off the unsecured portion would certainly qualify

Great. Thank you. Since you've looked at the issue of reaffirmations, do you have any sense of how often reaffirmations occur for a value less than the outstanding loan amount? -- whether they are approved is beside the point for me, but whether lenders even entertain the notion would be helpful to know.

And as important, once a Statement of Intention (SOI) is filed stating an intention to reaffirm, is there any consequence to not ultimately singing a reaffirmation agreement (even if such agreement precisely matches the terms of the original loan agreement, i.e. the lender is not unfairly asking the debtor to sign off on loan elements he's not seen before or that are less favorable than what the debtor agreed to in the original loan docs)? There seems to be little out on the Internet regarding the implications of ultimately not following through on an initial intent to sign an agreement. NOLO suggests that when signing a SOI that it is "expected" that the debtor follow through on this intention -- which seems to suggest that a debtor who signs an SOI that contains a stated intention to reaffirm can't later change his mind without a reason. So is a debtor to take such an admonition as an indication that there are actual penalties for not following through simply because the debtor changed his mind?

__________

EDIT: des, thanks for your response following debee's. My current loan agreement is at 0.9% for 60 months on a 12 month old car, so a reduction in principal is about the only negotiation left that might benefit me. I also understand that a ride-through may be an option with my lender.

[debee]

Since you've looked at the issue of reaffirmations, do you have any sense of how often reaffirmations occur for a value less than the outstanding loan amount?

I'm sorry I've never paid attention to the numbers. My interest was elsewhere. I think Des answers this in the post just before yours. See that. You might have missed it while typing.

And as important, once a Statement of Intention (SOI) is filed stating an intention to reaffirm, is there any consequence to not ultimately singing a reaffirmation agreement (even if such agreement precisely matches the terms of the original loan agreement, i.e. the lender is not unfairly asking the debtor to sign off on loan elements he's not seen before or that are less favorable than what the debtor agreed to in the So is a debtor to take such an admonition as an indication that there are actual penalties for not following through simply because the debtor changed his mind?

The consequences depend on the lender. If the lender wants a reaffirmation and you don't sign it, the stay will lift and they will be free to repo. To my knowledge, there is no other consequence. You are free to change your mind, to sign a reaffirmation and rescind, etc.

[DAE]

debee,

The consequences depend on the lender. If the lender wants a reaffirmation and you don't sign it, the stay will lift and they will be free to repo. To my knowledge, there is no other consequence. You are free to change your mind, to sign a reaffirmation and rescind, etc.

So no judicial penalties. That's good. I have yet to sign a Statement of Intention (SOI), but I don't want to enter into it without a lot of thought if I can't later change my mind. But I can't help but wonder what the value of a SOI is if the debtor can just change his mind later without fear of penalty. I understand that the SOI starts a clock for repossession absent an agreement, but such a clock could have simply been started X days from filing the petition, no? For instance, my lender called me after it received notice of the Chapter 7 filing and asked my intention so it could begin paperwork on the reaffirmation agreement. So even the "notice" value of the SOI is of no importance in this instance since my lender called me weeks before I am required to file an SOI.

[debee]

. But I can't help but wonder what the value of a SOI is if the debtor can just change his mind later without fear of penalty. I understand that the SOI starts a clock for repossession absent an agreement, but such a clock could have simply been started X days from filing the petition, no?

My understanding is that the SOI serves as a courtesy notice to creditors. They wanted to know what was going on with their stuff.

[DAE]

des, I see that on another Thread you stated:

Had this person NOT signed the [reaffirmation] agreement he/she would have been much better off. This is why I say:

“Why on earth would someone say to a creditor ‘despite my bk I will pay you and if I don’t you can sue the crap out of me’”?

This is exactly what each and every one of you is telling your creditor when you sign a reaffirmation agreement.

While you were speaking specifically of a mortgage, is this generally your opinion about auto loans too?

[sh9730]

DAE,

I dont have a lot more to offer than others, except that I am in a LEASE of a vehicle that I signed an intent to reaffirm in my SOI. I only got this car less than 6 months ago and I am behind several payments. So far, (and I filed 3 weeks ago) there has been no court activity in regards to this vehicle (i.e. motion to lift stay etc), although I am still receiving "statements" from them but no phone calls etc.

My plan is do to exactly as you are proposing....when it becomes neccessary, either because they file a motion to lift stay, or the BK is discharged (at which point the bank can resume activities to repo their property (but can no longer come after me for the arrears)...I will contact them and see if they want to work out some new plan....I assume that if this occurs before discharge that I will need to sign some sort of reaffirmation...although with a lease Im not sure it is exactly the same term. My hope is to either extend the lease term with lower payments or maybe they even switch it to a purchase agreement (at a reasonable price as you discuss).

As Des suggests they may have zero interest in any of this, and if that is the case then I will just surrender the property. But we ll see what happens.

My understanding is that in my district (AZ) the court rarely approves a reaff, even on a car....

Also, as for the SOI, as I do plan on trying to reaff, I am safe in any case since I am trying to complete the reaff...aside from which everything I read here and elsewhere says the only reprocussion if it eventually does not come to pass is the bank gets there property back.

[despritfreya]

@DAE,

Pre BAPCPA I would never recommend signing a reaff. Post BAPCPA, as it relates to personal property, I instruct my clients that if they do not sign there could be sever ramifications even if payments are current. I then leave it up to them to decide. Most sign but some take their chances. In the 9th Cir. a lender can enforce its ipso facto clause unless, under non-bankruptcy law, enforcement is prohibited. There is a move by the Judges to find ways around the issue. As debee has mentioned before, Judge Hollowell came out with In re Moustafi, 371 B.R. 434 (Bankr. Ariz. 2007) and other Judges have also cut down the creditors. However, I am not aware of any appellate level cases that protect a debtor in similar ways.

Des.

[DAE]

sh9730,

My plan is do to exactly as you are proposing

I'm not really proposing anything here since I'm not sure it's worthwhile to reaffirm or not. I'm sorry if I gave you the impression that I was locked in on a course of action. I'm still weighing all of my options. However, I'm glad that you're in a position to draw some conclusions.

[DAE]

Pre BAPCPA I would never recommend signing a reaff. Post BAPCPA, as it relates to personal property, I instruct my clients that if they do not sign there could be sever ramifications even if payments are current. I then leave it up to them to decide. Most sign but some take their chances. In the 9th Cir. a lender can enforce its ipso facto clause unless, under non-bankruptcy law, enforcement is prohibited. There is a move by the Judges to find ways around the issue. As debee has mentioned before, Judge Hollowell came out with In re Moustafi, 371 B.R. 434 (Bankr. Ariz. 2007) and other Judges have also cut down the creditors. However, I am not aware of any appellate level cases that protect a debtor in similar ways.

Des.

Thank you. The unsecured portion of the vehicle at 12 months into the loan is about 10% of the outstanding balance (so not a huge problem with regard to a deficiency if one should ever have to be addressed), but with an interest rate of 0.9% on the original loan, it's hard not to consider a reaffirmation if a ride-through is not an option.