August 27, 2014

Reaffirmation Agreements – Do They Make Sense?

Is “Ride-Through” still an option for Chapter 7 Debtors?

Prior to the bankruptcy law change in 2005, there was a circuit split (i.e. the courts were divided) as to whether debtors had the right to retain their vehicle and continue making regular monthly payments without signing a reaffirmation agreement in places that allowed “retain and pay.” The debtor’s personal obligation on the note was discharged, and the automatic stay prevented repossession of the collateral. If the debtor defaulted after the bankruptcy, he would not be on the hook for any deficiency after repossession.

Now that BAPCPA has made clear the elimination of the option of “retain and pay,” creditors have the ability to repossess a vehicle even if the payments are current, simply by virtue of the debtor filing a bankruptcy and not reaffirming the debt.

But, do creditors actually take advantage of this option?

The short answer seems to be “no.”

According to the American Bankruptcy Institute’s Reaffirmation Agreements in Consumer Bankruptcy Cases by Daniel Austin and Donald Lassman, “the likelihood of a creditor repossessing the collateral of a debtor who is current simply because a bankruptcy has been filed is very remote” (see pg. 31).

Creditors are almost always better off continuing to accept payments from a bankrupt debtor who refuses to reaffirm, as opposed to repossessing the collateral. Repossessed vehicles only net a small percentage of the loan balance after considering attorney fees, repo fees, storage fees, auction fees, and low market value of a vehicle at auction. So, creditors have very little incentive to expend the time and money necessary to compel reaffirmation. And even if the lender is successful in getting the debtor to reaffirm, there is no guarantee they will be able to collect from a judgment-proof debtor who later stops paying.

Nationwide, only 23% of cases ever have reaffirmation agreements filed in them. In Texas, the percentage is higher. At 37%, Texas ranks in the top four states, along with Mississippi, Alabama, and Maine (see Austin and Lassman pg. 61 & 62). It is hard to believe that so many Texas debtors make a fully informed decision to reaffirm. Reaffirmation agreements disproportionately benefit the creditor. The only up-sides to the debtor are (a) an ability to have timely payments reported on the debtor’s credit report, (b) maintaining a positive relationship with the creditor, and (c) eliminating the very small chance of repossession. Thus, the benefit of discharging your personal obligation to pay an entire auto loan usually greatly outweighs the limited benefits of reaffirmation.

From attorney to attorney, there seems to be a large disparity in percentage of reaffirmation agreements filed for clients. Some bankruptcy attorneys file many more reaffirmation agreements on their clients’ behalf than other attorneys. This is further evidence that something is amiss. Clearly, a large number of debtors are reaffirming debts that they do not really have to reaffirm. If you do not reaffirm, and the lender fails to repo while your bankruptcy case is still open, it is arguably too late for them to repossess on the basis of your bankruptcy. In other words, you can argue that they have waived the default you committed by filing bankruptcy, and thus can not lawfully repo the vehicle unless you create a new default by missing a payment or failing to maintain insurance, etc.

Granted, a small calculated risk must be accepted by the debtor when he chooses not to reaffirm. However small the chance may be, there is a possibility that the debtor’s vehicle will be repossessed even if he is current on the payments. Debtors should be cautious in choosing an attorney who will look out for their best interest when dealing with reaffirmation. Debtors should be wary of anyone who is too eager to have them reaffirm.

Making a sound financial decision should take priority over a personal attachment to a car, or a debtor’s strong desire to have their payments reported to the credit bureaus. In practice, the “ride-through” option has not been completely eliminated, and should be fully explained by the debtor’s attorney before a reaffirmation agreement is hastily signed.

What happens to my secured debts (such as car loan or house loan) when I file bankruptcy?

Often, when clients come into our office to have a consultation regarding filing bankruptcy there are many questions pertaining to the discharge-ability of certain debts.  Unsecured debts are easy.  They just get discharged in a Chapter 7.  But secured debts are more complicated.  With secured debt, the creditor has the right to take back the collateral (ex. the car in a car loan is collateral, and the house in a house loan is collateral).

The spiel we give our clients to best illustrate the relationship between the debtor, the creditor, and the collateral goes something like this. “When you buy a car, the bank gives you a loan to buy the car and attaches a lien (aka security interest) to the car. The lien allows the bank to recoup some of their money should the loan go into default, and you declare bankruptcy. So, the bank essentially has a hook into you personally to repay the loan, and the bank has a hook into the car also.  When you get a Chapter 7 bankruptcy discharge, the hook into you is snipped and gone, but the bank’s hook into the collateral remains.  This means you are no longer personally liable on the debt, BUT if you want to keep the car or the house, you will have to keep making the payments.

Reaffirmation Agreements (More Info Here) – You will have the option to sign a reaffirmation agreement with your bank and put yourself back on the hook for the debt that was discharged thereby keeping the relationship between the debtor, the creditor, and the collateral. But, why would you want to make yourself liable for a debt that was just discharged?

You wouldn’t, in most instances, need to sign a reaffirmation agreement. If you stopped payment on the debt, the creditor would merely repossess the vehicle, which can be a good thing for the debtor in certain situations (i.e. the debtor can no longer afford the vehicle.)  In our experience however, the creditor usually will not repossess a vehicle merely because the debtor is no longer on the hook for the debt, unless the debtor fails to keep making payments on the loan. This means that in spite of not signing the reaffirmation agreement the debtor will usually be able to keep the collateral by continuing to make payments.  You should discuss this matter with your local bankruptcy attorney.

What is exempt property?

Exempt property is property that can not be taken from you by your creditors. In other words, it is property that is exempt from levy by creditors. Even hundreds of years ago in England, where our legal system was developed, debtors were able to keep the shirts on their backs. Today the law is more generous. The idea behind exemptions is that debtors get to keep the minimal property necessary to sustain themselves and their livelihoods. So, in most states, the list of exempt property includes things like clothing and personal effects, tools of the trade, one vehicle per driver (up to a limited dollar amount of value), your home (up to a limited dollar amount of value in most states), retirement accounts, and life insurance policies.

After hearing that list, most people say, “That covers everything I own. What kinds of things are not exempt?” Common examples of non-exempt property which CAN be taken by creditors include boats, RV’s additional real estate (i.e. real estate other than your homestead), stocks/bonds, ownership of a business, expensive jewelry and cash in a checking or savings account.

Each state has its own list of which types of property are on the list and what is on the list can vary greatly from state to state. And there are several exceptional types of debts, such as child support and taxes, that can allow creditors to reach even otherwise exempt property.

Also, if a debtor voluntarily places himself into bankruptcy, additional federal laws come into play which can vary what is exempt and what is not.

Pay Day Loan Lenders and Threats of Criminal Prosecution for Hot Checks

Pay day loan lenders are often the most aggressive about collecting.  I routinely hear about pay day loan lenders violating debt collection laws.  They commonly ask you to make out postdated checks for them when you borrow the money.  Then, when they deposit those checks later, if one bounces, they call and threaten to report you to the police for writing a hot check.  Sometimes, they even say “You could go to jail for writing that hot check.”  This is not true.  You can’t be convicted of a crime without having some level of intent (i.e. a state of mind involving some level of desire or wilful disregard towards commission of the crime).  Writing a post-dated check is not a crime.  And having less money in the future than you expected is also not a crime.

These threats by debt collectors are illegal.  It is illegal to threaten criminal prosecution to collect a debt, especially when no crime has been committed!  If you have a writing or recording of these threats, you should visit with an attorney about the possibility of filing a lawsuit against the debt collector for illegal debt collection practices under the Federal Debt Collection Practices Act (which applies in all states) or the Texas Debt Collection Practices Act (which applies only in Texas).

Everything I have stated above, and everything I write on this blog, assumes that the acts took place in Texas and Texas law applies. I can’t say for certain, but I would imagine that other states are more or less the same with regard to their hot check writing laws.  After all, it would violate common sense, basic human decency, and the United States Constitution to imprison someone who had no level of intent towards commission of a crime.  Check with your local bankruptcy lawyer.

How long does it take for the bank to foreclose on my house?

Answer:  On average it takes more than a year.

Source:

“The average loan in foreclosure—the process typically starts when a loan becomes 90 days past due and a bank files a complaint—had been in default for 492 days.”

http://online.wsj.com/article/SB10001424052748703865004575648900250047766.html?mod=WSJ_hp_mostpop_read

New Debtors Prisons?

This article from the Wall Street Journal seems to indicate that people are being sent to jail for failing to pay debts.  I practice law in Texas, and I know that in Texas a person can not be jailed for failing to pay a debt.  However, people can be jailed for failing to comply with a court order, such as an order to appear in court at a hearing, or to hand over certain documents requested by the creditor.  Most states allow garnishment of wages (Texas does not), so I guess in most states you could be jailed for failing to follow a court order to hand over a percentage of your wages.  But, to my knowledge, no state allows people to be jailed just for not paying debts.  I think there would be a Constitutional problem with that.

 

http://online.wsj.com/article/SB10001424052748704396504576204553811636610.html?mod=WSJ_hp_editorsPicks_3

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