Reaffirmations & Credit Reporting – Theory & Practice (Part 2)

Last week, we were discussing reaffirmation agreements in contrast to a “ride-through”; the latter of which is a method of keeping collateral after filing for bankruptcy without assuming the risk of liability on a deficiency balance should you default on the loan in the future, with the only risk being loss of collateral.
We were discussing the two main reasons why people would opt for a reaffirmation agreement instead of doing a ride-through, and having dispensed with the first (less common) reason, let’s continue on to the second more prolific reason…
#2 – Credit Reporting
Conventional wisdom these days suggests that secured creditors will report post-petition payments to credit bureaus if and only if a debtor enters into a reaffirmation agreement.  Creditors argue that if they report payments without a reaffirmation agreement, that they would be in violation of the discharge injunction.
While this may be conventional practice, we want to explore a little deeper to determine what legal responsibilities exist.  To do that, we’re going to try to answer two major questions.

1. If a reaffirmation agreement is not signed, are creditors violating the discharge injunction if they report post-petition payments?

I am unable to find any case law that suggests that making reports of payments to the credit bureaus – in the absence of a reaffirmation agreement – constitutes a violation of the discharge injunction.  And there’s an obvious reason for this – if a debtor makes payments on a ride-through and his payments are being reported – he is getting both the benefit of positive credit reporting AND reduced liability for not having signed a reaffirmation agreement.  Why on earth would he sue for violation of the discharge injunction?

11 U.S.C. § 524(a)(2) is the primary provision prohibiting the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor”.  It is difficult to imagine how reporting payments that a debtor makes could constitute an act to induce such payments.  The only conceivable issue here is if, during a ride-through, the debtor defaults and then – under the FCRA requirement that credit reporting be done accurately – the creditor reports a missed payment.  That could, conceivably, be considered a discharge violation if the debt was discharged in the absence of a reaffirmation agreement.  But the argument that the reporting of payments received as being a discharge violation is patently absurd.

2. If a reaffirmation agreement is signed, do creditors have an affirmative duty to report post-petition payments?

Simple answer is: NO.  There is no provision of the Fair Credit Reporting Act, nor the bankruptcy code, which imposes an affirmative duty upon any creditor to make reports to the credit bureaus.  This is true, even in cases that don’t involve a bankruptcy case.  Under FCRA, creditors are only obligated to make accurate reports, if they report at all.  There is no authority to compel them to make a report at all.

Failure to report payments does not constitute a violation of the discharge injunction.  See In re Bates, 517 B.R. 395 (Bankr. D. N.H. 2014)In re Manning, 505 B.R. 383 (Bankr. D. N.H. 2014), and In re Estrada, 439 B.R. 227 (Bankr. S.D. Fla. 2010).  (Estrada notes that language in a notice which threatens the suspension of credit reporting for failure to sign a reaffirmation agreement may be an impermissible violation of the automatic stay.)

Special thanks to Hon. Margaret D. McGarity and Atty. Michael J. Maloney for case summaries in Bates, Manning, and Estrada.

Summary

Continuing to make payments on secured loans like home mortgages or auto loans (and non-dischargeable debts like student loans) are a terrific way to reestablish credit history and rebuild your credit score after bankruptcy.  These are pre-existing loans, so there is no need to try to get financing approval despite just having filed for bankruptcy.

A ride-through is a less-risky way to proceed, in that in the event you default on a mortgage or auto loan in the future, you only stand to lose the collateral, and you cannot be held liable for a deficiency balance.

However, most secured creditors – as a policy – refuse to report post-petition payments to credit bureaus in the absence of a reaffirmation agreement (which does leave you potentially liable for a deficiency balance).  Although creditors have no affirmative duty to make reports, even with a reaffirmation agreement, they are not in violation of the discharge if they choose to condition their reporting on a reaffirmation agreement.

15 U.S.C. § 1681s-2 – Relevant Provisions
(a) Duty of furnishers of information to provide accurate information
(1) Prohibition
(A) Reporting information with actual knowledge of errors. A person shall not furnish any information relating to a consumer to any consumer reporting agency if the person knows or has reasonable cause to believe that the information is inaccurate.
(B) Reporting information after notice and confirmation of errors. A person shall not furnish information relating to a consumer to any consumer reporting agency if—
(i) the person has been notified by the consumer, at the address specified by the person for such notices, that specific information is inaccurate; and
(ii) the information is, in fact, inaccurate.
(D) Definition. For purposes of subparagraph (A), the term “reasonable cause to believe that the information is inaccurate” means having specific knowledge, other than solely allegations by the consumer, that would cause a reasonable person to have substantial doubts about the accuracy of the information.
(2) Duty to correct and update information. A person who—
(A) regularly and in the ordinary course of business furnishes information to one or more consumer reporting agencies about the person’s transactions or experiences with any consumer; and
(B) has furnished to a consumer reporting agency information that the person determines is not complete or accurate, shall promptly notify the consumer reporting agency of that determination and provide to the agency any corrections to that information, or any additional information, that is necessary to make the information provided by the person to the agency complete and accurate, and shall not thereafter furnish to the agency any of the information that remains not complete or accurate.
(3) Duty to provide notice of dispute. If the completeness or accuracy of any information furnished by any person to any consumer reporting agency is disputed to such person by a consumer, the person may not furnish the information to any consumer reporting agency without notice that such information is disputed by the consumer.
(4) Duty to provide notice of closed accounts. A person who regularly and in the ordinary course of business furnishes information to a consumer reporting agency regarding a consumer who has a credit account with that person shall notify the agency of the voluntary closure of the account by the consumer, in information regularly furnished for the period in which the account is closed.
(5) Duty to provide notice of delinquency of accounts
(A) In general. A person who furnishes information to a consumer reporting agency regarding a delinquent account being placed for collection, charged to profit or loss, or subjected to any similar action shall, not later than 90 days after furnishing the information, notify the agency of the date of delinquency on the account, which shall be the month and year of the commencement of the delinquency on the account that immediately preceded the action.
(B) Rule of construction. For purposes of this paragraph only, and provided that the consumer does not dispute the information, a person that furnishes information on a delinquent account that is placed for collection, charged for profit or loss, or subjected to any similar action, complies with this paragraph, if—
(i) the person reports the same date of delinquency as that provided by the creditor to which the account was owed at the time at which the commencement of the delinquency occurred, if the creditor previously reported that date of delinquency to a consumer reporting agency;
(ii) the creditor did not previously report the date of delinquency to a consumer reporting agency, and the person establishes and follows reasonable procedures to obtain the date of delinquency from the creditor or another reliable source and reports that date to a consumer reporting agency as the date of delinquency; or
(iii) the creditor did not previously report the date of delinquency to a consumer reporting agency and the date of delinquency cannot be reasonably obtained as provided in clause (ii), the person establishes and follows reasonable procedures to ensure the date reported as the date of delinquency precedes the date on which the account is placed for collection, charged to profit or loss, or subjected to any similar action, and reports such date to the credit reporting agency.
 (7) Negative information
(A) Notice to consumer required.
(i) In general.  If any financial institution that extends credit and regularly and in the ordinary course of business furnishes information to a consumer reporting agency described in section 1681a(p) of this title furnishes negative information to such an agency regarding credit extended to a customer, the financial institution shall provide a notice of such furnishing of negative information, in writing, to the customer.
(ii) Notice effective for subsequent submissions.  After providing such notice, the financial institution may submit additional negative information to a consumer reporting agency described in section 1681a(p) of this title with respect to the same transaction, extension of credit, account, or customer without providing additional notice to the customer.
(B) Time of notice
(i) In general.  The notice required under subparagraph (A) shall be provided to the customer prior to, or no later than 30 days after, furnishing the negative information to a consumer reporting agency described in section 1681a(p) of this title.
(ii) Coordination with new account disclosures.  If the notice is provided to the customer prior to furnishing the negative information to a consumer reporting agency, the notice may not be included in the initial disclosures provided under section 1637(a) of this title.
(C) Coordination with other disclosures. The notice required under subparagraph (A)—
(i) may be included on or with any notice of default, any billing statement, or any other materials provided to the customer; and
(ii) must be clear and conspicuous.
(8) Ability of consumer to dispute information directly with furnisher
(D) Submitting a notice of dispute. A consumer who seeks to dispute the accuracy of information shall provide a dispute notice directly to such person at the address specified by the person for such notices that—
(i) identifies the specific information that is being disputed;
(ii) explains the basis for the dispute; and
(iii) includes all supporting documentation required by the furnisher to substantiate the basis of the dispute.
(E) Duty of person after receiving notice of dispute. After receiving a notice of dispute from a consumer pursuant to subparagraph (D), the person that provided the information in dispute to a consumer reporting agency shall—
(i) conduct an investigation with respect to the disputed information;
(ii) review all relevant information provided by the consumer with the notice;
(iii) complete such person’s investigation of the dispute and report the results of the investigation to the consumer before the expiration of the period under section 1681i(a)(1) of this title within which a consumer reporting agency would be required to complete its action if the consumer had elected to dispute the information under that section; and
(iv) if the investigation finds that the information reported was inaccurate, promptly notify each consumer reporting agency to which the person furnished the inaccurate information of that determination and provide to the agency any correction to that information that is necessary to make the information provided by the person accurate.
(b) Duties of furnishers of information upon notice of dispute.
(1) In general. After receiving notice pursuant to section 1681i(a)(2) of this title of a dispute with regard to the completeness or accuracy of any information provided by a person to a consumer reporting agency, the person shall—
(A) conduct an investigation with respect to the disputed information;
(B) review all relevant information provided by the consumer reporting agency pursuant to section 1681i(a)(2) of this title;
(C) report the results of the investigation to the consumer reporting agency;
(D) if the investigation finds that the information is incomplete or inaccurate, report those results to all other consumer reporting agencies to which the person furnished the information and that compile and maintain files on consumers on a nationwide basis; and
(E) if an item of information disputed by a consumer is found to be inaccurate or incomplete or cannot be verified after any reinvestigation under paragraph (1), for purposes of reporting to a consumer reporting agency only, as appropriate, based on the results of the reinvestigation promptly—
(i) modify that item of information;
(ii) delete that item of information; or
(iii) permanently block the reporting of that item of information.
11 U.S.C. § 524 – Relevant Provisions

(a)(2) A discharge in a case under this title operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived.
(b)(2)(C) Subsection (a)(3) of this section does not apply if an agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, only if—
(1) such agreement was made before the granting of the discharge under section 727, 1141, 1228, or 1328 of this title;
(2) the debtor received the disclosures described in subsection (k) at or before the time at which the debtor signed the agreement;
(3) such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that—
(A) such agreement represents a fully informed and voluntary agreement by the debtor;
(B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and
(C) the attorney fully advised the debtor of the legal effect and consequences of—
(i) an agreement of the kind specified in this subsection; and
(ii) any default under such an agreement;
(4) the debtor has not rescinded such agreement at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim;
(5) the provisions of subsection (d) of this section have been complied with; and
(6)
(A) in a case concerning an individual who was not represented by an attorney during the course of negotiating an agreement under this subsection, the court approves such agreement as—
(i) not imposing an undue hardship on the debtor or a dependent of the debtor; and
(ii) in the best interest of the debtor.
(B) Subparagraph (A) shall not apply to the extent that such debt is a consumer debt secured by real property.
(f) Nothing contained in subsection (c) or (d) of this section prevents a debtor from voluntarily repaying any debt.
(j) Subsection (a)(2) does not operate as an injunction against an act by a creditor that is the holder of a secured claim, if—
(1) such creditor retains a security interest in real property that is the principal residence of the debtor;
(2) such act is in the ordinary course of business between the creditor and the debtor; and
(3) such act is limited to seeking or obtaining periodic payments associated with a valid security interest in lieu of pursuit of in rem relief to enforce the lien.

Reaffirmations & Credit Reporting – Theory & Practice (Part 1)

A key component to helping people rebuild credit after filing for bankruptcy are post-filing payments on reaffirmed debts.  However, there’s a lot of confusion – even among attorneys and other professionals – about creditors’ obligations to report these payments.  So today, we’re going to examine key statutes, case law, and some anecdotal evidence.  We’re going to discuss what creditors legally are and are not obligated to do, and how these obligations may differ from what we see in common, every day practice.
But first, I’m going to assume that you have not read other posts on this blog about reaffirmations, so let’s hit up some basics: What is a reaffirmation agreement?

Contrary to common belief, almost all secured debts are dischargeable.  In terms of dischargeability, they are no more or less special than other unsecured debts like credit cards, payday loans, or medical bills.  This is how and why people are able to file for bankruptcy, walk away from a home or vehicle that they don’t want, and not be liable for a deficiency balance.
But secured liens are not extinguished in bankruptcy (except in rare case of stripping unsecured mortgages in Chapter 13, judgment liens, etc.).  So while a secured creditor may not be able to pursue you for a deficiency balance, they can act upon their security interest and foreclose or repossess collateral if you default on the loan.  And of course, that right exists even if you don’t file for bankruptcy – bankruptcy just extinguishes their right to pursue you for money on the loan.  So you can’t just stop paying your mortgage and expect to be able to continue to remain in your home, even if you file for bankruptcy.
A reaffirmation agreement takes your dischargeable pre-petition obligation and converts it into a post-petition obligation that is not discharged in bankruptcy.  In other words, if you enter into a reaffirmation agreement and default, then not only can the creditor repossess the collateral, but they can also pursue you for a deficiency judgment.
Reaffirmations are NOT required.  On the contrary.  They are voluntary agreements.  A creditor can no more require you to sign a reaffirmation agreement than you can require a creditor to sign one.  In fact, some creditors – as a policy – don’t bother with reaffirmation agreements.
Strictly from a liability standpoint, I (along with most other attorneys I’ve spoken to) would prefer that our clients not enter into a reaffirmation agreement.  There is always the possibility that something will happen down the road, and you are unable to continue to make payments on your mortgage or car loan.  Without a reaffirmation agreement – the worst thing that the creditor is entitled to do is repossess the collateral.  With a reaffirmation agreement – the creditor can repossess the collateral AND seek a deficiency balance.
What I (and most other attorneys) prefer are what we refer to as a “ride-through”.  A ride-through is when a bankruptcy debtor retains collateral, continues to make normal monthly payments on a secured loan, but does so without a reaffirmation agreement.  This way, the debtor keeps their property, but minimizes their risk in case something happens down the road.
Sounds great!  Why doesn’t everyone do a ride-through?  Why don’t attorneys INSIST that their clients just do a ride-through?  Well, two reasons.
#1 – The Risk of Repossession
This almost never happens.  Many years ago, there were rumors that Wells Fargo was foreclosing on homes and repossessing vehicles, even though the debtors were current on their payments.  The sole reason they foreclosed and repossessed?  The debtors had not signed a reaffirmation agreement, which Wells Fargo considered a technical default and grounds for exercising their security interests.
11 U.S.C. § 521(a)

(6) [I]n a case under chapter 7 of this title in which the debtor is an individual, not retain possession of personal property as to which a creditor has an allowed claim for the purchase price secured in whole or in part by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors under section 341(a), either –
(A) enters into an agreement with the creditor pursuant to section 524(c) with respect to the claim secured by such property; or
(B) redeems such property from the security interest pursuant to section 722.

In Steinhaus, Idaho Central Credit Union argued that this language (revised under BAPCPA in 2005) limited a debtor to 3 options: reaffirm, redeem, or surrender.  Since Steinhaus had not entered into a reaffirmation agreement within the proscribed time period, ICCU demanded termination of the automatic stay, an order compelling surrender of property, and an order authorizing foreclosure.  The court agreed that 11 U.S.C. § 362(h) permitted ICCU to obtain termination of the automatic stay, but disagreed that it had authority to compel surrender of collateral or to authorize foreclosure.  In re Steinhaus, 349 B.R. 694 (Bankr. Idaho, 2006).

The right to repossess is still controlled by applicable state law, and we get a pretty good discussion of that in Henderon, a Nevada case that specifically deals with Nevada law that differs from the Uniform Commercial Code.  In this particular case, it was decided that the contract provision invoking an ipso facto right of recovery based solely on the filing of bankruptcy or lack of a reaffirmation agreement was invalid under Nevada law.  In re Henderson, 492 B.R. 537 (Bankr. Nev., 2013).

Wisconsin’s default provisions are outlined at Wis. Stat. § 425.103.  I’ll include them here for reference, but I’m not going into an analysis of the code.  The point is that since the right of recovery is an issue of state law, the bankruptcy court has no authority to compel surrender of collateral, which means you – as a bankruptcy debtor – can force this issue before a state court judge.  An informal survey suggests that most judges are not inclined to permit repossession based solely on the lack of a reaffirmation agreement.

(2) ”Default”, with respect to a consumer credit transaction, means without justification under any law:(a) With respect to a transaction other than one pursuant to an open-end plan and except as provided in par. (am); if the interval between scheduled payments is 2 months or less, to have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the scheduled or deferred due dates, or the failure to pay the first payment or the last payment, within 40 days of its scheduled or deferred due date; if the interval between scheduled payments is more than 2 months, to have all or any part of one scheduled payment unpaid for more than 60 days after its scheduled or deferred due date; or, if the transaction is scheduled to be repaid in a single payment, to have all or any part of the payment unpaid for more than 40 days after its scheduled or deferred due date. For purposes of this paragraph the amount outstanding shall not include any delinquency or deferral charges and shall be computed by applying each payment first to the installment most delinquent and then to subsequent installments in the order they come due;(am) With respect to an installment loan not secured by a motor vehicle made by a licensee under s. 138.09 or with respect to a payday loan not secured by a motor vehicle made by a licensee under s. 138.14; to have outstanding an amount of one full payment or more which has remained unpaid for more than 10 days after the scheduled or deferred due date. For purposes of this paragraph the amount outstanding shall not include any delinquency or deferral charges and shall be computed by applying each payment first to the installment most delinquent and then to subsequent installments in the order they come due;(b) With respect to an open-end plan, failure to pay when due on 2 occasions within any 12-month period;(bm) With respect to a motor vehicle consumer lease or a consumer credit sale of a motor vehicle, making a material false statement in the customer’s credit application that precedes the consumer credit transaction; or(c) To observe any other covenant of the transaction, breach of which materially impairs the condition, value or protection of or the merchant’s right in any collateral securing the transaction or goods subject to a consumer lease, or materially impairs the customer’s ability to pay amounts due under the transaction.

As a matter of practice, most creditors will permit a ride-through, and there are two major reasons for this.  First – if a debtor is willing to continue make payments on a secured debt, they’re going to receive more money if they permit the ride-through rather than immediately demanding turnover of the collateral.  If the debtor defaults, they still have a right of recovery and sale later on.  (For example, if collateral is worth $10k at auction and a debtor makes $500/mo payments for a year before defaulting, the creditor potentially gets $16k out of the deal; whereas they only get the $10k if they repossess immediately.)  The circumstances in which a creditor may not want to wait for a default is where there is significant risk or danger that the property will be damaged or wasted before the default, significantly devaluing the asset by the time it can be sold.

The other reason most creditors permit a ride-through is because threatening to repossess in the absence of a reaffirmation agreement would conceivably be a violation of the discharge at 11 U.S.C. § 524(c)(3)(A).

Capital Credit Union and Cross-Collateralized Loans

Cross-collateralized loans have been a subject of discussion in the past, but I felt it was worth revisiting.  About a year ago, Pioneer Credit Union merged with Capital Credit Union and ever since then, many Chapter 7 clients have reported being bullied by Capital CU into reaffirming cross-collateralized loans, with strong emphasis that their policies on reaffirmation are “all or nothing”.
This isn’t exactly new.  Credit unions are famous for cross-collateralized loans and they’ve always had the ability to insist on an all-or-nothing approach to reaffirmation agreements.  But Capital CU’s hard sell on this makes this topic worth mentioning again.
The situation of cross-collateralized loans arises when a debtor has multiple loan accounts with the same financial institution (almost always a credit union in these cases).  If one of the loans is secured by collateral, then other loans, which might otherwise have been unsecured, are secured to the same collateral.  For example, you might have a $10k auto loan secured by your vehicle (PMSI) and two signature loans for $2k each.  By virtue of cross-collateralization, the two signature loans also become secured by the vehicle as well (but non-PMSI in this case).
Credit unions can theoretically force you to reaffirm on all three loans instead of just the one PMSI loan or force you to surrender the vehicle (this is the “all or nothing” approach that Capital CU has been insisting upon lately).
Although they have the right, the likelihood of them actually enforcing it is nihl.  When faced with the choice of being paid on a single reaffirmation (in the example above, $10k and losing out on the $4k in non-PMSI loans) or repossessing the vehicle and selling it (where they are unlikely to get much money at all and unable to enforce any of the loans after the bankruptcy discharge is issued), they usually settle and take the one reaffirmation agreement.  However, by insisting that their policy is “all or nothing”, they frighten borrowers who don’t want to lose their vehicle and bully them into signing all of the reaffirmation agreements.
A smart debtor needs to have the courage to call the credit union’s bluff.  Be willing to walk away from the vehicle.  When you think the outcome all the way through to its logical end, the credit union will almost always fold and allow the one reaffirmation agreement.

Reaffirmation Agreements That Never Were

Scenario:  John Doe filed Chapter 7 Bankruptcy in 2013, discharging about $60k in unsecured debt while reaffirming on his mortgage and car loan.  He has never missed a payment since his bankruptcy case was filed.  Now, 2 years later, he has pulled his credit report and is dismayed to find out that while his auto loan payments have been reported, his mortgage payments have not.  As a result, his credit score hasn’t improved as much as he would have hoped by now.  He calls his bankruptcy attorney and finds out that while he entered into a reaffirmation agreement on the auto loan, he did not enter into such an agreement on the mortgage.  Instead, he was doing what is referred to as a “ride through” – making payments sans a reaffirmation agreement.
Why is this happening?
To be honest, we’re not really sure.  Last October, after the conclusion of the Annual Bankruptcy Update in Milwaukee, I had a discussion with 7 other attorneys concerning a lender’s requirement to report payments with or without a reaffirmation agreement.
On the one hand, the Fair Credit Reporting Act (FCRA) only requires creditors to make accurate reports to the credit bureaus.  It does not, however, confer an affirmative duty to report at all.  In other words, any creditor can choose to report or not report, but if they do report, those reports must be accurate.
There was nothing in either the FCRA nor the bankruptcy code that any of us were aware of that indicated that lack of a reaffirmation agreement meant that a lender could not report payments, nor that filing a reaffirmation agreement forced a lender to report payments.  (In fact, it is entirely possible that payments might not be reported, even if a reaffirmation agreement is filed.)
It just seems to be “the way it is” – a matter of convention and policy rather than law.  At least one attorney reported being told by a creditor that the creditor’s policy was to not report without a reaffirmation agreement because to do so would be a violation of the discharge injunction.  Not only do we feel that argument is specious, but the inducement that creditors are making (no reaffirmation, no reporting) might itself be the bigger violation of the discharge injunction.
To the best of my knowledge, this has not yet been litigated in this district.
Can a reaffirmation agreement be filed now so that my payments get reported?
No.  At least, not in the Eastern District of Wisconsin.  The judges here (and I imagine in most districts) have a very strict policy that reaffirmation agreements will not be approved if they are entered after the discharge order is issued, and that cases cannot be reopened for this purpose.
Whose fault is this?
Usually, it’s nobody’s fault.  Reaffirmation agreements are voluntary agreements between a debtor and creditor.  A creditor cannot force an unwilling debtor to enter into an agreement, nor can a debtor force an unwilling creditor to enter into an agreement.
Unless someone deliberately obstructed transmission of the agreement, or if the debtor failed to notify the creditor of their intent, or if the creditor simply neglected to draft the agreement – there is no blame.
Why didn’t my bankruptcy attorney draft the reaffirmation agreement?
I have yet to meet a single debtor attorney who drafts reaffirmation agreements.  And I think we all refuse to draft them for the same reasons.  Reaffirmations are agreements between the creditor and debtor.  I’m happy to review the agreement, advise in favor of or against signing the agreement, and signing off on the agreement when appropriate.  But the agreement should still be drafted by one of the parties to the agreement.  And the creditor has access to contractual information (interest rates, maturity dates, current payoff balances, etc.) necessary to properly complete the agreement that the debtors’ attorney may not have access to (at least, not all of the information).
This is the worst thing ever!
Not necessarily.  Reaffirmation agreements turn otherwise dischargeable debts into non-dischargeable debts.  Yes, secured debts like mortgages and auto loans are dischargeable and presumed to be discharged in the absence of a reaffirmation agreement.  One of the nice things about a ride-through is that it allows you to retain your property without assuming the risk of having to pay a deficiency if you ever default and have your property repossessed.
In other words, let’s say a year after you file for bankruptcy, you default on your mortgage payment.  Without the reaffirmation agreement, the lender is only empowered to foreclose the property.  They cannot collect a balance from you.  With the reaffirmation agreement, they can foreclose AND collect a deficiency balance from you.
In fact, the only good reason to sign a reaffirmation agreement is for the credit reporting to help rehabilitate your score.  But there are other ways to rebuild credit.
I still want my payments reported, gosh darn it.
You have a couple of options, but none guaranteed to work.
  1. Talk to the lender.  Ask them to report your payments.  (This works better with smaller local banks and credit unions than it does with the big banks.)  If the creditor failed to provide you with an agreement – tell them that you would have signed the agreement if they had drafted one.  Since they chose not to, it’s hardly fair to punish you for their inaction.
  2. Refinance.  This is going to be difficult without the payment history to help rebuild your credit.  If you’re refinancing with the same lender – many of them refuse to refinance because of the lack of the reaffirmation agreement (which is really stupid, because with the refinance, they have a legal claim to the money; without it, they do not).
  3. Dispute the lack of reporting with the credit bureaus.  This has been suggested by a few attorneys.  Gather evidence of all of your post-petition payments and send them in to TransUnion, Experian, and Equifax.  Explain that your payments haven’t been reported because a reaffirmation agreement was not filed.  The problem with this approach is that – if you’re disputing a credit reporting error – there’s no error to correct.  Again, FCRA only requires that creditors report accurately, it does not require them to report at all.  Even if the credit bureaus do amend your report to show the payments, it still doesn’t mean that your lender will report payments going forward, which means that you will have to continually update the bureaus yourself.

Pioneer CU / Capital CU

In recent days, I’ve received multiple complaints from clients who are receiving collection letters from Capital CU on debts that should have been discharged in bankruptcy.
In each case, the client had multiple loan accounts (secured and unsecured) with Pioneer CU, reaffirmed on the secured loan and not the unsecured loan.  The unsecured loans would otherwise have been secured by cross-collateralization, but they were not part of the executed reaffirmation agreement and therefore discharged in bankruptcy.
In short, Capital CU is making collection attempts in violation of the discharge injunction.
I have spoken to a representative at Capital CU and have been advised that there was a notation issue when the accounts transferred from Pioneer’s systems to Capital’s systems.
If you receive a collection letter on a debt you believed was discharged in bankruptcy, call my office before making any payments.  These issues should be easily resolved when brought to Capital’s attention.

Reaffirmation Strategies – Junior Mortgages

One of my jobs as your bankruptcy attorney is to help you prepare for life after bankruptcy – including rebuilding your credit while minimizing your potential risks.  Today, I’d like to discuss reaffirmation strategies – and specifically – whether you should sign a reaffirmation agreement for a second or third mortgage.
But first, let’s back up and explain what a reaffirmation agreement is and why you might need one.
A common misconception I have encountered among my clients is that secured debts are non-dischargeable.  This is not true.  Your secured debts (e.g. mortgages and auto loans) are every bit as dischargeable as a credit card, payday loan, civil judgment, or medical bill.  And that’s a good thing.  This allows people to file for bankruptcy and walk away from their home and car free-and-clear – so they can get a true fresh start.
However, bankruptcy only discharges debt.  It doesn’t get rid of the liens.  So, if you file for bankruptcy and stop making payments on your mortgage – the lender may not be able to sue you for payment, but they can take back possession of their collateral (i.e. foreclosure).
Not everyone wants to surrender their home or car when they file bankruptcy.  In fact, I’d estimate my clients choose to retain between 85% and 90% of their secured loans.  So what do they do if their secured debt is dischargeable but they want to keep the collateral?  Well, that’s where reaffirmation agreements come in.
Plainly-speaking, a reaffirmation agreement is the voluntary exemption of a debt from discharge.  (Another way I like to think of it is that they turn a pre-filing debt into a post-filing debt.)  Reaffirmation agreements are great in that they let you keep your stuff and help rebuild your credit faster.  The downside to a reaffirmation agreement is that if you run into financial trouble again after your bankruptcy, the discharge won’t protect you from collection on that debt.
There are a number of things a bankruptcy client should consider before signing a reaffirmation agreement.  I won’t get into those here.  Suffice it to say, I include a comprehensive list of considerations as a cover letter when I send out reaffirmation agreements for the client to review.
What I want to discuss is a strategy in dealing with junior mortgages.  IMPORTANT: This advice should not be followed blindly.  There are a number of considerations that could affect your decision to sign an agreement or not, and you should discuss those particular circumstances with your bankruptcy attorney.
What I have found to be the best strategy in about 95% of cases is for the debtor to sign the reaffirmation agreement on the first mortgage, but not on any secondary mortgages (or HELOCs).
Why?  Let’s pretend you file bankruptcy, sign the reaffirmation agreement on the first mortgage (let’s say Bank of America), don’t sign a reaffirmation agreement on the second mortgage (let’s say Associated Bank), and later hit another financial snag and default on your mortgage payments.  The house is going into foreclosure and you’ve elected to walk away from it, but you’re hoping to not have to file bankruptcy again.
In the state of Wisconsin, primary mortgage lenders almost always waive seeking a judgment for a deficiency balance (the difference between what you owe on the mortgage and what the house sells for).  Even though you signed a reaffirmation agreement with Bank of America, they’re not pursuing you for the money.
Associated Bank, on the other hand, is not required to waive deficiency.  Because you didn’t sign a reaffirmation agreement, the bankruptcy discharge still protects you from collection attempts on this mortgage.
You might be asking yourself: Wouldn’t Associated Bank foreclose if I don’t sign a reaffirmation agreement?  Highly unlikely.  First, a junior lienholder will almost never foreclose (even in the event of a default), because at auction, the house will sell for less than what is owed on the first mortgage, which means the junior lienholder will have paid all of the expenses of a foreclosure and get nothing out of it in return.  Second, most lenders won’t foreclose simply because you didn’t sign a reaffirmation agreement (it’s possible, but rare).
If you continue to make monthly payments to the creditor without signing a reaffirmation agreement, this is called a “ride-through”, and often considered a safe way to reaffirm while insulating yourself from liability down the road.  The only real drawback to a ride-through is that many lenders will refuse to report payments to the credit bureaus in this instance.  (If lenders report to credit bureaus, they are required to report accurately.  However, they have no affirmative duty to report at all.)

Why reaffirm?

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?

Reader-Submitted Question

Someone posted a question in the comments section of an old post I wrote in 2009.  It’s an excellent question (and I welcome readers to post questions), and since it’s buried, I decided to re-post it here.
QUESTION:
I had a Chapter 7 discharged in 2009 (in Wisconsin). I recently became aware that my first and second mortgages were on my credit report as “part of the bankruptcy”, though I have always paid on time, before and after the bankruptcy. I was unaware that I needed to sign formal agreements to do so and my attorney did not advise me in this area. I certainly was never presented with the forms, and in fact, the mortgagor says they did not receive any paperwork. It is now too late to do so and, as a result, I am not getting credit for my payments through the credit bureau. When I asked Bank of America why they did not originate a request to reaffirm (which I assume they would rush to do) I was told it would now be easier for them to foreclose on me, should I ever stop making payments. Should I be concerned? What, if anything can i do at this point? Thanks!
ANSWER:
Bankruptcy is good against the world. All of your debts, whether they are listed or unlisted, presumptively dischargeable or non-dischargeable – they are all affected by a bankruptcy filing. In the case of secured loans, bankruptcy eliminates debts, but it does not eliminate liens. Therefore, in having a secured debt discharged in bankruptcy, a secured creditor can still realize their security interests via repossession or foreclosure. This is why – in extremely rare cases – certain vindictive creditors will repossess or foreclose in the absence of a reaffirmation agreement.
Secured debts like mortgages and car loans are actually dischargeable. The reaffirmation agreement is a tool that excepts those debts from discharge and prevents the lender from repossessing or foreclosing unless there is some future default in plan payments. Without the reaffirmation agreement, the debt is technically discharged. With the reaffirmation agreement, the debt survives, and the creditor can collect deficiencies against the debtor in the event of foreclosure or repossession. (Which is why it makes no sense for Bank of America to say it is easier to foreclose – the reaffirmation agreement actually gives them more protection.)
The vast majority of secured creditors will not foreclose or repossess, even if the debtor does not sign a reaffirmation agreement, so long as the debtor continues to make monthly payments. This is called a “ride through”, and it’s a pretty good deal for the debtor, because if they do default in the future, their bankruptcy still protects them from collections.
The downside to the ride through is that the lenders are not required to report payments to the credit bureaus (though some do as a courtesy). And that’s the issue you’re faced with now. Once the case is discharged or closed, the court here in the Eastern District of Wisconsin (other districts may have different policies) will not allow you to reopen the case to file a reaffirmation agreement.I would venture to say that your only two options are to contact Bank of America to see if there is someone you can talk to about having your payments reported or to file a dispute with the credit bureaus (see http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.pdf).
The only other option I can think of is for you to refinance. Get a new company to assume the debt, pay off Bank of America, and then – having a valid new debt with the second creditor – your payments would be reported correctly. Unfortunately, this would be a tough feat to accomplish in this economic environment.
Most of the bankruptcy attorneys I know (myself included) will not initiate drafting of reaffirmation agreements, because the lender is generally in the best position to have the details of the original loan agreement necessary to complete the forms. Also (and I’m just speaking for myself), there is no practical way of tracking whether certain creditors have submitted reaffirmation agreements for our clients (especially since it is not always in our clients’ best interest to file a reaffirmation agreement). However, because of the very issue you’re facing, I’ve made a point of informing my clients about reaffirmation agreements, their consequences (both in signing and not signing one) and what they need to do if the lender does not initiate a reaffirmation agreement. Most secured creditors will submit reaffirmation documents without being prompted.
Unfortunately, I don’t have a good answer for your situation, but I hope – at least – you find the information useful.  Although the lack of credit reporting is unfortunate, I wouldn’t be too concerned about foreclosure.  Just keep making your mortgage payments.  And in the event you do default on your mortgage in the future and the home does foreclose, you can at least rest easy knowing that they can’t come after you for more money.

Should I reaffirm my secured debts?

Before we discuss the financial prudence of reaffirming on the debt, we should first establish whether the court will allow you to reaffirm on a secured debt. We first look to whether the reaffirmation would be an abuse. Expect that each jurisdiction has different levels of scrutiny. In my home district, the court is relatively relaxed on the subject. In Chapter 7, most of my clients can reaffirm on any debt they choose without much hassle. Where it gets sticky is when debtors choose to reaffirm unusually expensive debts and/or debts for “toys”. If the debtor could conceivably afford to pay their unsecured debt by ditching luxury items, then the trustee could certainly object that there is some abuse going on. In Chapter 13, the analysis is much the same, but a little more restrictive. Secured debts squeeze out money available for unsecured creditors. Our trustee tends to disallow secured debts for luxury or recreational items (including more than one vehicle per debtor) unless the debtor is willing to match the secured payment for the unsecured creditors – which may be expensive!
Once it has been established that the reaffirmation is not an abuse, the next question is whether it is financially wise for you to reaffirm. You will need to make a prudent decision as to whether the reaffirmation is in your best financial interest. Here, the court will largely defer to your decision, but they will often step in to evaluate your decision and in some cases, override your decision. The basic factors to consider:
Is the debt necessary? Usually yes if it is your home or primary vehicle. Less so if it is for a timeshare, your third vehicle, or big-screen TV.
Is the collateral over-financed? It might be time to cut your losses if you are paying $18,000 for a 1994 Geo Metro, even if you can afford it.
Can you afford the payment? Analyze the principal balance, the interest rate, length of the loan, and monthly payment. If you’re living on $20,000 per year, you probably can’t afford a $300,000 mortgage.
Can you get a new loan for new collateral at a better deal after bankruptcy? Reaffirming on secured debts that existed before filing for bankruptcy is an excellent and easy way to rebuild your credit. But don’t discount the possibility of finding a new loan after bankruptcy that will have better terms.
In Chapter 7, many of your secured creditors will send you a reaffirmation agreement to sign. Even if you have decided to reaffirm the debt, you might not necessarily want to sign the agreement. First and foremost, if you default on your loan payment after you have entered into a reaffirmation agreement – you will be liable for the whole amount of the debt. Your bankruptcy discharge will not protect you from collection efforts. Second, although failure to sign a reaffirmation agreement can be interpreted as a technical default and invite repossession, the odds are next to nil that a creditor would repossess your property despite you remaining current on payments.
In short – reaffirming secured debts can help rebuild your credit, but you should only reaffirm on what you need and can afford.

Can I pick and choose which debts to include in bankruptcy?

Generally no. In bankruptcy, all creditors of a certain class must be treated equally. To do otherwise shows an unfair preference to a group of creditors at the expense of other creditors. There are, of course, distinctions by class. You can’t file against non-dischargeable debts like taxes, child support, and student loans. You will notice that your attorney will still list these debts on your bankruptcy schedules, and this is done for mandatory disclosure requirements.
In chapter 7, your unsecured debts – credit cards, medical bills, personal loans, and the like – will all be discharged. In Wisconsin, we have case law (In re: Guseck) which indicates that debts are discharged, even if they are left off of your schedules. This works to the debtor’s advantage when they simply lose track of all their bills and neglect to add one before they file.
The only real picking and choosing you get to do in Chapter 7 is on secured debts. You can choose to retain property and reaffirm on the debt. Alternatively, you can surrender property and have the deficiency balance discharged. In Chapter 13, we can be slightly more creative and treat creditors differently for a variety of reasons – but only to a limited extent. The rules in Chapter 7 generally apply to Chapter 13 as well.
Many debtors complain that they don’t want to include certain debts. Usually, this is because it is a debt owed to a professional that the debtor wishes to maintain a future business relationship with – most commonly doctors, attorneys, and auto mechanics. However, these creditors are ordinarily unsecured creditors, just like credit cards. They must be listed on schedules and given notice of the bankruptcy, and their debts legally discharged. If you make payments to these creditors prior to filing for bankruptcy, they will constitute a preferential payment which can be recovered by the Trustee by lawsuit and re-distributed to all unsecured creditors.
Although these creditors have no legal right to pursue you for the debts you discharged, you are permitted by statute to pay the debt back voluntarily after your discharge has been issued.