REAFFIRMATION is the legal process that allows bankruptcy debtors to recognize that a debt survives bankruptcy. If a debt is reaffirmed and debtor defaults after bankruptcy, creditor can sue debtor to collect on what is owed despite the bankruptcy discharge. § 524© of the bankruptcy code provides the requirements for reaffirmation. It distinguishes between a reaffirmation where debtor attorney is involved in negotiations, and one where debtor attorney is not involved (debtor negotiates by himself without an attorney). If debtor has no attorney in reaffirmation negotiations, the court may approve such agreement if the court finds that the agreement does not impose an undue hardship on the debtor or a dependent of the debtor, and the agreement is in the best interest of the debtor. The court must also inform debtor that such an agreement is not required under bankruptcy law and non-bankruptcy law and of the legal effect and consequences of a reaffirmed agreement and a default under such agreement. If debtor had an attorney in reaffirmation negotiations, attorney must state that attorney has fully advised debtor of the legal effect and consequences of a reaffirmed agreement and any default under such agreement. Although reaffirmations appear to involve a simple procedure, a debtor without a lawyer in reaffirmation appears to face more obstacles from the court because the court must find that the agreement does not impose an undue hardship on the debtor.
A car purchase loan agreement requires reaffirmation. If the car loan is reaffirmed, creditor can collect the repossession deficiency in case of default in the future despite the bankruptcy discharge. Under the old bankruptcy law, there was no such thing as reaffirmation. To keep a car loan, all debtor had to do under the old law was continue make timely car payments. In case of default in the future, creditor could not collect any deficiency because the bankruptcy discharge wiped out the future deficiency. Now, if debtor does not reaffirm, creditor may repossess the car even if debtor is current on car payments. But if debtor reaffirms, he is subject to a deficiency judgment in case of default despite bankruptcy discharge.
However, a lease assumption is an entirely different transaction under bankruptcy law. Lease assumptions do not have to be reaffirmed to make them enforceable after bankruptcy. Lease assumption agreements are authorized under § 365(p) which refers to a debtor in a chapter 7 case where debtor notifies creditor in writing that debtor desires to assume the lease. Upon being notified, creditor may at its option, notify debtor that it is willing to have the lease assumed by debtor and may condition such assumption on cure of any outstanding default on terms set by the contract. Thus, a lease assumption does not require reaffirmation.
In Re Thompson, debtor filed for chapter 7 relief and entered into an Assumption of Closed End Vehicle Lease Agreement where he assumed the obligations under the lease for a 2004 Civic. He subsequently obtained a discharge. Unable to maintain his lease payments, he surrendered the car to the lessor. Shortly thereafter, lessor obtained a state court judgment against debtor for $7,551. Debtor responded with a motion to hold the lessor in contempt of the discharge injunction. His motion basically said that the assumption agreement, though made pursuant to § 365(p), was not enforceable because it did not meet the reaffirmation requirements of § 524©. The lessor argued that the debtor’s liability was transformed from a prepetition one to a post-petition one by the execution of the agreement. The court agreed with the lessor. “Congress clearly contemplated that lease assumption agreements might be made after entry of the discharge, otherwise there would be no need to authorize the parties to negotiate such agreements notwithstanding the discharge injunction under § 524(a)(2)”, the court said. Therefore, lease assumptions and reaffirmations are distinct from each other.
Many car creditors will not repossess cars as long as payments are current. If this is your creditor’s mindset, do not reaffirm, just continue payments.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.
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