I have blogged in the past about why it is critical to disclose all of your debts on your bankruptcy schedules, even ones you don’t want to include or “file against”. The two main things to take away from that article are:
- Listing a debt is NOT the same thing as “filing against” or discharging a debt.
- You have an obligation to disclose all creditors – dischargeable or non-dischargeable, secured or unsecured – as a matter of due process.
So, with that in mind, let’s move on to the topic of reaffirmation agreements. Again, there are two main points to make in order to understand why a reaffirmation agreement may be necessary.
- Bankruptcy wipes out debts, but it does not remove liens (with some exceptions).
- Secured debts are generally dischargeable debts.
All right, so let’s put ourselves in an alternate reality where there is no such thing as a reaffirmation agreement, but all other bankruptcy laws are the same. You file for bankruptcy and receive a discharge. The discharge is good against the world. Therefore, your mortgage and car loan are discharged. This means that you have no obligation to pay the mortgage company and vehicle lender, and they have no legal right to pursue you for payment.
However, bankruptcy did not wipe out the security interest that existed. In the absence of payment, the vehicle lender repossesses your car and your mortgage company forecloses on your home.
Enter the reaffirmation agreement. A reaffirmation is a post-petition affirmation of a debt. In a way, it converts an existing, pre-petition debt into a post-petition debt, and makes it non-dischargeable under the old bankruptcy. (It can be discharged in a future bankruptcy, provided that enough years lapse such that you are eligible for a discharge.)
Reaffirmation agreements are voluntary and must be entered into by both parties – the creditor and the debtor. A debtor who wishes to reaffirm cannot force an unwilling creditor to enter into a reaffirmation agreement. A creditor who wishes to reaffirm cannot force an unwilling debtor to enter into a reaffirmation agreement.
So, what are some of the advantages and disadvantages to reaffirming?
First, reaffirming a secured debt allows you to keep the collateral so long as you continue to make payments on the loan. A failure to reaffirm does not necessarily mean that you lose the collateral (you can make payments without a reaffirmation, which we refer to as a “ride through”), but there are some creditors who consider a failure to reaffirm as a default, and sufficient cause to foreclose or repossess.
Second, reaffirming a secured debt is an excellent way to rebuild credit after bankruptcy, because you don’t have to apply for a new loan – it already exists, and the payments you make on it after your case is filed will help boost your credit score. In the absence of a reaffirmation agreement, however, creditors are not obligated to report your payments to the credit bureaus.
Third, if you file a reaffirmation agreement, but then default on the loan later, the creditor is not only able to repossess or foreclose, but the creditor can also sue you for full payment of the deficiency balance afterward. Your bankruptcy discharge won’t protect you. Whereas, if you do not file a reaffirmation agreement, but later default on the loan, you still face the foreclosure or repossession, but won’t be liable for the deficiency.
Here are a few other things to consider when making an informed decision to reaffirm a debt or not…
Creditors are generally under no obligation to repossess or foreclose a property if they do not want to. Although this is uncommon with real estate and vehicles, if this does happen, you could remain liable for things like property taxes, liability insurance, winterization and heating costs, parking violations, and so forth. If you cannot get a creditor to physically take the keys to real estate or a vehicle, you probably should not abandon the collateral until they actually come for it. And don’t just sell the collateral, either. The lender could come back later for the collateral, and if it isn’t available for collection, you could be assessed criminal penalties. Property that has a lien on it should never be sold without the lender’s express consent and – ideally – a lien release.
For smaller secured loans (like furniture loans, appliance loans, and jewelry loans), although the creditors have the right to repossess if you default or do not sign the reaffirmation agreement, it is highly unlikely that they actually will. The costs of repossession almost always outweigh the price the lender will realize at auction.
Creditors who claim to have security in stuff you buy might not necessarily have a valid purchase money security interest (PMSI). Best Buy is notorious for having very vague security agreements which list as security “all of the debtor’s assets” or “all the debtor’s personal property” or “all items purchased”. Under Wisconsin law, 409.108(3) of Wisconsin statutes indicates that generic descriptions are okay for finance agreements, but not sufficient for security agreements. There needs to be some reasonable detail of the collateral.
If you do want to reaffirm, the agreement must be filed with the Bankruptcy Court within 60 days of the date of your 341 hearing (which is when you are scheduled to receive your discharge). Your case cannot be reopened to get a late-filed reaffirmation approved. (You can file a motion to delay discharge to allow more time to complete a reaffirmation agreement. You can also reopen a case to file a reaffirmation agreement after discharge, but the court will not approve it, and at the expense of a $260 filing fee.)
Notwithstanding considerations of positive credit reporting and eliminating the risk of foreclosure and repossession, there are other things you should consider before filing a reaffirmation agreement. Most notably – can you afford it? Often overlooked is the budget, but what good is a fresh start in bankruptcy if you’re just going to dig yourself into a new hole with something you cannot afford. Consider the following factors:
- What is the monthly payment? Can I afford to pay it?
- What is the interest rate? Could I get a new loan for this sort of collateral at a better rate? How much of my payment is actually going to the principal balance?
- What is the term of the loan? Do I have to make this payment for 6 months or 30 years?
- How much is the collateral worth? Does it make sense to pay $20,000 for a car that is worth $6,000? Might it be cheaper to finance a new car?
- Is the collateral necessary? Sure, I love my 72″ plasma television, but is paying $200 a month for it really worth it when I have a wife and two kids to feed?
From time to time, I hear an anecdote from a client that reminds me that everywhere across the country, there are thousands of people who are not getting the fresh start they need because of misconceptions about bankruptcy.
The other day, I met with a fellow who was terrified that if he filed for bankruptcy, that he would lose his car, because a friend of his filed for bankruptcy, and she lost her car.
I explained to him that bankruptcy does not necessarily mean you will lose a car. In fact, losing a car because of bankruptcy is incredibly rare. Losing a car during bankruptcy (but not because of bankruptcy) is a little more common. There are still others who choose to voluntarily give up their vehicle in the course of a bankruptcy, though there is no mandate that anyone do so.
There are only two ways that someone can lose a vehicle in bankruptcy. And one of those ways doesn’t really have to do with the bankruptcy at all.
First, you could lose a car if there is a secured loan on the vehicle and you have defaulted on the loan, resulting a repossession. This often occurs while someone is preparing to file for bankruptcy, but it certainly doesn’t happen because of it. If you default on a secured loan payment, creditors have a right to repossess, whether you file for bankruptcy or not. Thinking that bankruptcy has anything to do with repossession is the classic post hoc, ergo, propter hoc logic fallacy. After this, therefore, because of this. In fact, the repossession had absolutely nothing to do with the bankruptcy, the timing just happened to coincide because the bankrupt debtor was struggling on all bills, car loans included.
The second way to lose a vehicle in bankruptcy is if the equity in the vehicle exceeds the allowable exemptions. Again, this is pretty rare. Most vehicles don’t have equity to begin with. Most vehicles depreciate rapidly the moment you drive them off of the lot. Additionally, most people pay the minimum amounts on their vehicle loan. This ensures that throughout much of the life of the vehicle, the amount owed on the car exceeds the value of the car, creating no equity. By the time the debt is paid down enough to create equity, the car is several years old, has tens of thousands of miles on it, and is worth maybe a couple thousand dollars. At that point, Wisconsin residents enjoy pretty healthy motor vehicle exemptions whether they elect federal exemptions: $3,450, plus any remaining wildcard exemption (up to $11,975) using federal exemptions, and $4,000, plus any remaining household goods exemptions (up to $12,000) using state exemptions – and both numbers are doubled for joint filers.
Still, there are times where there are vehicles in excess of exemptions, such as people who have purchased a new vehicle recently with cash and have no loan against it, people with expensive large vehicles, or people who have a collection of cars of high or antique value. In these scenarios, it is possible that your exemptions will fall short of the equity you own. But even then, the trustee has to want to sell the car. In my experience, trustees don’t like to sell stuff, particularly in today’s economy. They prefer to liquidate non-exempt assets that are easier to move, such as real estate, cash, and cash-like items such as tax refunds.
And by the way – both of these problems (non-exempt equity or a default on a secured loan payment) can both be fixed by filing a Chapter 13 Bankruptcy instead of Chapter 7.
The moral of the story is that no two bankruptcy cases are exactly alike. How your bankruptcy case will unfold, how you will benefit, the extent of your relief, and the negative consequences you experience are highly contextual and dependent on the specific circumstances of your case.
It is important not to rely on the anecdotal evidence you hear from friends and family, who may not fully understand how or why certain things may have happened to them. Consult with an experienced attorney to find out exactly what bankruptcy will mean for you, so that you can make an informed decision and weigh the risks and benefits for yourself.
Proposed changes have been made to the official bankruptcy forms by the Judicial Conference’s Advisory Committee on Bankruptcy Rules. Public review and comments are invited through February 15, 2013. They can be accessed at http://www.uscourts.gov/RulesAndPolicies/rules/proposed-amendments.aspx.
One of the interesting items I noticed on the new forms is additional detail being asked of claimed dependents (those living at home, those not living at home, and others). Since there isn’t a consensus on what constitutes a household size (which is crucial in determining the median income levels and appropriate deductions on the Means Test), I foresee that the newly requested details will spawn new litigation on the question of household size.
One approach is the one taken by the U.S. Census Bureau – the number of residents of a particular structure. This is also known as the “heads on beds” rule, which is not concerned with the existence of familial or economic relationships within the household. This approach finds support in case law appearing in Arizona (Epperson), Minnesota (Bostwick & Ellringer), and the Western District of Michigan (Smith).
A second approach is to use the standards set forth in 11 U.S.C. 707, which references standards set forth by the Internal Revenue Service. Generally speaking, this approach limits the household size to the debtor, the debtor’s spouse (if there is one), and dependents that can be claimed as dependents for purposes of federal income taxes. This approach has been adopted by courts in South Carolina (Napier), Kansas (Law), and the Western District of Virginia (Frye).
Courts in the Middle and Western Districts of North Carolina (Herbert & Morrison), the Southern District of Ohio (Jewell), and the Eastern District of Virginia (Robinson) subscribe to an “economic unit” approach, which sort of incorporates the “heads on beds” approach but interlays an economic relationship requirement, and also accounts for dependent children living outside the household.
I have seen trustees here hint at the second and third tests. So far, neither Robinson nor Frye (the two most recent cases of those two approaches) have been cited by a bankruptcy court of controlling authority in Wisconsin.
The closest case I could find in the Eastern District of Wisconsin that discussed household size was Judge Kelley’s Crego decision in 2007, but the holding was essentially about double-dipping in claimed expenses, not which approach was the correct one. At this time, I am unaware of any cases that bind a Wisconsin judge.
That may change if the new bankruptcy forms, as they are proposed now, set off a new wave of decisions regarding this question.
In other news, Judge James E. Shapiro – who retired at the end of last year – has now been succeeded by Judge G. Michael Halfenger. Earlier, Catherine J. Furay was named to replace Judge Thomas S. Utschig in the Western District of Wisconsin, who also retired at the end of last year.
The first quarter of each year is hectic for most bankruptcy attorneys. The number of filings tends to increase dramatically due to post Christmas credit card bills, higher heat utility bills, income taxes, property taxes, annual membership dues and other annual fees that often come due this time of year, and of course – all culminating with April 15 – the date Wisconsin Public Service, WE Energies, and Alliant Energy can disconnect Wisconsin customers who are delinquent on their utility bills.
Amidst the craziness, there are just a few reminders I’d like to pass along.
- If you own real estate, previously sent in a copy of your 2011 property tax bill, and your case is not yet filed for any reason – be advised that your 2012 property tax bill is now required.
- Chapter 13 debtors who have already filed bankruptcy – remember that when you file your tax returns, you must also send a copy of your returns to the Chapter 13 Trustee. Some of you may also be required to send in 1/2 of your tax refund. To see if this applies to you, refer to the most recent copy of your plan, or call your attorney to check your obligations.
- Chapter 13 debtors who have already filed for bankruptcy – have you completed your financial management course yet? For those of you assigned to Trustee Thomas J. King, please check his website for new date / time offerings. http://www.ch13oshkosh.com/debtored.html
- Chapter 13 debtors who have not yet filed bankruptcy – file your tax returns as quickly as possible. Even though they are not due until April 15, Chapter 13 cases filed after December 31, 2012 cannot be confirmed until 2012 tax returns are on file with the IRS and the state.
- If you do fall behind on your utilities this winter, be prepared to file bankruptcy well in advance of April 15. Do not wait until the last minute to file – you will not be the only person trying to avoid a power shut-off.
Don’t be another statistic. Call me today to find out how Chapter 13 Bankruptcy can help save your home from foreclosure.
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