Reaffirmation

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Mortgage lien stripA very recent opinion from the Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) establishes the legitimacy of something I have been doing in Chapter 20 cases.  It’s nice to know I was right all along.  This post brings you up to speed on the good news for debtors in the BAP case.  A bit of background will help to put the case into its proper perspective.

If you are new to bankruptcy practice, and have given the Bankruptcy Code a cursory glance, you might think I am out of my mind referring to a Chapter 20 bankruptcy in the tile to this post.  After all, the Code doesn’t even have a Chapter 20.  (Whether or not I am out of my mind is best left to the many voices in my head to determine.  What did you say?  Are you calling my dog a liar?)  The term, “Chapter 20” is used by bankruptcy attorneys to refer to a Chapter 7 followed by a Chapter 13.  Since 7 + 13 = 20, Chapter 20 is used as a short hand.

I.  Reasons For Doing A Chapter 20

Since Chapter 7 discharges most debts without the debtor having to make any payments to creditors, why would anyone want to do a Chapter 20?  One reason lies in 11 U.S.C. § 109(e)’s debt ceilings (I have corrected the dollar amounts, which haven’t been updated at the linked site for quite some time.):

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525 may be a debtor under chapter 13 of this title.

Based on this Code section, if a debtor has more than $383,175 in noncontingent (i.e., doesn’t depend on a triggering event for its validity), liquidated (i.e., the dollar amount of the debt is certain), unsecured (i.e., there is no collateral securing the debt) debt, then Chapter 13 is unavailable.

Since Chapter 7 has no debt ceilings (though it does have income ceilings, which can be made precise using 11 U.S.C. § 707(b)), the debtor can first do a Chapter 7 to get rid of as much unsecured debt as possible, and then do a Chapter 13 to deal with debts that weren’t discharged in the prior Chapter 7, or to catch up on a delinquent mortgage.
Continue Reading Lien Stripping In A Chapter 20 Bankruptcy

I recently had an exchange with a fellow bankruptcy attorney who expressed some confusion over the treatment of car leases in bankruptcy.  His confusion arose because of something he heard a judge say at a hearing on reaffirmation.  The judge’s comments appear to indicate that the distinction between lease assumption and debt reaffirmation is not clear in everyone’s mind.  This post will clear up the confusion.
Continue Reading Reaffirming Debts vs. Assuming Leases In Chapter 7 Bankruptcy

A fellow attorney recently asked me this question because she had a client who failed to attend the reaffirmation hearing.  As a result, the judge disapproved the reaffirmation agreement.  She wondered if the creditor could now repossess the car.  The short answer is: Yes.  What’s going on here?

I.          To Reaffirm Or Not To Reaffirm, …

This question comes up all the time – either explicitly, or implicitly – during my consultations with prospective and current clients.  Because there is no shortage of misinformation on the subject, it’s about time I wrote on it.

I.          Secured Debts

In typical consumer bankruptcy practice reaffirmation comes up almost exclusively within the Chapter 7 context, and generally in dealing with secured debt.  A secured debt is a debt that is secured by some tangible asset.  If the debtor (i.e., the borrower) fails to make the payments, the creditor (i.e., the lender) can repossess the security – i.e., the collateral.  For example, a car loan is secured by the car, and a home mortgage is secured by the home.

In order to better understand what is at work here, it helps to know a little more about secured debts.  A simple example will suffice to set the stage.  When a person takes out a loan to purchase a car, two important things happen. 
Continue Reading What Is Reaffirmation?