Filing a reaffirmation agreement in a chapter 7 bankruptcy proceeding is a commonplace occurrence for many attorneys. However, the reaffirmation process is fraught with nuances and traps for the unwary attorney. Absent appropriate planning, these nuances may transform an otherwise standard-fee representation into an unpleasantly expensive lesson for both attorney and creditor alike.
1. The process is time-sensitiveChapter 7 debtors must file a statement of intention within 30 days of the petition date or the date of the 341 meeting, whichever is earlier.[1] They must perform their stated intention within 30 days of the first date set for the 341 meeting,[2], or within 45 days if the creditor has a purchase money security interest in the collateral.[3] Reaffirmation agreements must be filed with the Court within 60 days of the first date set for the 341 meeting.[4] This deadline may be extended, but reaffirmation agreements must be filed before entering the debtor’s discharge.[5]
2. Some reaffirmation agreements require court approval.If an attorney in the reaffirmation process represents the debtor, the agreement is automatically effective upon filing with the court, provided the attorney has submitted the declaration or affidavit stating that the agreement was voluntary, the debtor was advised of the legal consequences of reaffirmation and default under such an agreement, and the agreement does not impose an undue hardship.[6] If the debtor is pro se, the court must approve the agreement unless the agreement concerns a consumer debt secured by real property.[7]
3. Beware the rescission trap.The debtor may rescind a reaffirmation agreement by giving notice of rescission to the creditor before entering the debtor’s discharge or within 60 days after the agreement is filed, whichever occurs later.[8] Consider the case of a bank with a purchase money security interest in the debtor’s vehicle and an unsecured claim arising from a credit card. The bank requires the debtor to reaffirm both debts to keep the vehicle and sends the debtor separate agreements proposing to reaffirm both debts according to their respective contractual terms. The debtor signs both, and they are timely filed. The bank appears to have won the battle. Still, it will lose the war because once the debtor rescinds the agreement as to the credit card, the bank will have no legal basis to repossess the vehicle unless and until the debtor defaults under the reaffirmed vehicle loan. On the other hand, if the debts are addressed in a single agreement, the debtor cannot rescind the agreement without risking losing the vehicle. However, this strategy should be avoided when one of the debts is secured by real property, lest the creditor inadvertently waives the anti-modification protections afforded to mortgage lenders in chapter 11 or 13.[9]
4. Credit Unions are special.Where the debtor is pro se, or the debtor’s attorney has not submitted a declaration or affidavit that the reaffirmation agreement does not impose an undue hardship on the debtor, the reaffirmation agreement is not effective unless and until the court approves it.[10] The court must find that the agreement is in the best interests of the debtor and that it does not present an “undue hardship.” An undue hardship is presumed if the debtor’s monthly income less her monthly payments leaves...
