Bankruptcy Bits

Reaffirmation timing under BACAPA

It is important to remember that BAPCPA did not change the provision that a debtor may rescind a reaffirmation agreement the later of (i) sixty (60) days from the date such reaffirmation agreement has been filed with the court, or (ii) the date the court issues the discharge order.

The grounds for setting aside reaffirmation agreements are limited after the time to rescind has expired. Reaffirmation agreements are not favored by bankruptcy courts and are strictly construed based on conventional contract principles.

After the time to rescind had expired, Courts have failed to allow recession. In the case of In re Curcio, 242 B.R. 192 (Bankr. S.D. Fla. 1999), the court rejected a Chapter 7 debtor's request to rescind a reaffirmation agreement after the entry of the agreement and after the finding that it would not impose undue hardship. The Court held that the agreement becomes enforceable to the same extent as if the Debtor had never filed for bankruptcy relief and that the Court was powerless to set aside the agreement.

See also In re McCrelass, 141 Br. 223 (Bankr. N.D. Fla., 1992,) in which the Court held that a reaffirmation agreement could not be rescinded after the time period even though there was a finding. After the expiration of the time to rescind the agreement, that continued performance under the agreement would impose an undue hardship on the debtor.

In sum, the time for reaffirmation remains very limited. A creditor cannot obtain a reaffirmation before a bankruptcy petition is filed because any pre-petition waiver of a bankruptcy discharge is against public policy and unenforceable. A creditor cannot obtain a reaffirmation after the discharge has been granted, because that is unenforceable. The only time to obtain the reaffirmation is between the filing of the petition and the granting of the discharge. Seeking a reaffirmation with the debtor before the discharge is entered is not considered a violation of the automatic stay unless the creditor harasses the debtor.

By: Justin H. Dion, Esq.

Counsel’s certification under BACAPA

The requirement that Debtor’s counsel certify that the reaffirmation agreement does not impose a hardship creates a potential conflict for counsel. On one hand, it may be the client’s true desire to reaffirm a debt in order to be able to retain the property and/or have their continued payments positively impact their credit score. However, on the other hand, if in fact a reaffirmation is going to cause a Debtor to fall into default, the attorney cannot certify the agreement and must leave the decision to the Court.

Because of this certification requirement, many attorneys refuse to sign reaffirmation agreements on the basis that they are not in a position to determine whether the debtor can make the future payments, and therefore do not want to assume liability for certifying the ability to repay a debt.

BAPCPA does not require an attorney sign the reaffirmation agreement; however, if the attorney does sign, then the signature must include the certification.

By: Justin H. Dion, Esq.

Reaffirmation requirements under BACAPA

Reaffirmation agreements must be approved by the Court or the agreement is void. BAPCPA included a substantial overhaul of the reaffirmation process. The overhaul is largely accomplished by expanding the scope of disclosures that creditors must make to debtors before the parties enter into their agreement. Section 524 of the New Bankruptcy Code now requires that all reaffirmation agreements contain extensive new disclosures detailing:

• The rights of the Debtor
• Specifying the amount of debt reaffirmed
• The annual percentage rate, which must distinguish between an extension of credit under an “open credit plan” and an extension of credit not issued under an “open credit plan.” The annual percentage rate section also contains an optional section that may be used to detail various repayment schedules.
• When payments will begin
• Filing requirements with the court
• The right to rescind
• The debtor is required to complete and execute a Debtor’s Statement in Support of Reaffirmation Agreement regarding the reaffirmation agreement. If the debtor is acting without an attorney in the context of a reaffirmation agreement with a creditor, court approval of the reaffirmation agreement is required after a hearing. And;
• A certification signed by the attorney that the agreement does not impose an “undue hardship” on the debtor, or if it does present undue hardship, that circumstances exist that permit the debtor to overcome the hardship.
  

By: Justin H. Dion, Esq.

§603 Audit - pointers for counsel

If representing a Debtor who has been selected for a §603 Audit, counsel should keep in mind the following:

• Be Prepared - Anticipate that all cases will be audited, so address the audit possibility with clients as part of the initial intake process. Make sure clients understand the disclosure requirements and the scope of document production if an audit is conducted.
• Contact the Auditor - Communicate with the auditor immediately after the audit notice. Generally developing a positive and proactive relationship with the auditor will allow the audit to proceed in a manner favorable to your client.
• Be Cooperative – Generally, the items sought are straightforward documents to evidence the accuracy of the schedules, many of which Counsel should already have as part of their usual due diligence. If counsel does not have all the records requested, it is important to stay in contact with the client to advise them exactly what is needed and when it must be produced. Keep careful track and copies of all documents sent to the auditor, as well as those still needed.
  Be the Intermediary – Be sure to have all communication and documents from Debtor go through counsel’s office in order to ensure production is accurate and timely.
• Assure the Client – The client will likely be overly concerned when hearing the word audit. Assure the client that procedure is not targeting their case, but is merely random and used to assure accuracy.

In April 2008, the United States Department of Justice issued a Public Report on the audit program. This report indicates that of the 4,095 cases designated for audit, at least one material misstatement was reported in 1,061 cases (30%.) However, the percents varied widely by district, with misstatements ranging from 9 percent in South Carolina to 55 percent in the Eastern District of Okalahoma. Although the report ultimately deems the program a success, it is important to note that no information was given regarding the consequences of a material misstatement.

It is important to note that even when a material misstatement is reported, in many cases no further action was taken by the trustee to dismiss the case, as the trustee did not believe the misstatement to be significant.

By: Justin H. Dion, Esq.