Diamond Speaks His Mind on Bankruptcy and Related Topics

Why Some Reaffirmation Agreements Are Approved And Others Are Not?

A reaffirmation agreement is a contract that is used in a Chapter 7 Bankruptcy case that must be approved by the Bankruptcy Judge, in most cases without a court hearing.  In general, the purpose of this agreement is to agree to repay what is owed to a creditor, in almost all cases the debt is secured by something that the debtor bought and wishes to keep.  A good example would be an automobile.  If the Debtor wishes to keep the car and still owes money on the car, he/she must agree to continue to pay for the car. 

A reaffirmation agreement is sent to the Debtor's lawyer by the Creditor, who then obtains the client's signature and then must certify that the reaffirmation agreement is in the debtor's best interest and does not present an undue hardship, as set forth in the bankruptcy code.  The document is then filed with the Court and approved by the Judge without a hearing.  However, as with all things in life, there are exceptions that would trigger a hearing before the Bankruptcy Judge, at which time the client, through his/her attorney would have to justify the reaffirmation agreement. 

One example, is that the debtor's budget filed as part of the paperwork that started the bankruptcy case does not demonstrate that the debtor would have the money to pay for the car the debtor wants to retain.  In this case, the debtor would have to find a way show the Judge that the payments could be made without creating undue hardship. 

Another example, would be the debtor wishes to reaffirm an unsecured debt and the debtor's lawyer is unable to certify the reaffirming the debt is in the debtor's best interest.  In this case the Judge is going to want to know what makes this particular unsecured claim different from the other unsecured claims, that he should allow the debt to be reaffirmed.  Justifying this type of reaffirmation usually requires demonstrating to the Judge that there is something unique about either the debt or the relationship between the debtor and the creditor.  An example of a reaffirmation agreement that I presented to the court was a situation in which the debtor had a career in the military and served his country honorable for a long time and had retired in El Paso to be close to a large military base as well as a military hospital.  He had always shopped on post and had always had a military credit card allowing him to make credit purchases on post.  His argument was simple -- He had always shopped on post and always had a military credit card and that the use of this credit card was not a contributing factor to his bankruptcy.  In short, he wanted to continue to do what he had been doing for over thirty years.  When I finished arguing the debtor's position the judge did not hesitate in making a ruling.  He stated:  "I come from a military family and I understand the special relationship that exists between this person and this particular creditor.  I further understand that not to allow this debt to be reaffirmed would be a life changing event for this retired person.  The Reaffirmation Agreement was approved by the Court.     

 

 

 

  

 

DISCHARGABILITY OF STUDENT LOANS IN BANKRUPTCY

In an average bankruptcy case, regardless of the chapter (7,13) filed, student loans are not dischargeable.  In the Western District of Texas, payments on student loans may not be included in a Chapter 13 Plan unless such plan proposes to pay the unsecured creditors 100% of their claims.  Instead, student loans are deferred until after the Chapter 13 plan has been completed. All the while interest is accruing on these loans. 

There are possibilities that present opportunities to discharge student loans, as set forth below: 

 1. The opportunity to discharge a student loan is to determine whether or not the loan made is actually a student loan.  The provisions of the bankruptcy code dealing with student loans are very specific, although very broad as to what constitutes a student loan that is non-dischargeable.  Therefore, each loan must be examined to determine whether or not the loan is of a type that falls within the definition of the statute.  If it does not, then the loan is dischargeable like any other unsecured claim.

 2. The opportunity to discharge a student loan is set forth in the statute and reads in part "unless accepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for..."  The burden of proof a debtor must overcome is very high but not impossible.  What constitutes "undue hardship" is in fact driven and therefore is dependent on the facts in each case.

 3. A potential opportunity that is presented is more complex and deals with the situation where a loan was made but the educational institution failed to furnish that which was promised at the time the loan was made.  An example of this type of situation is where an educational institution failed before the institution furnished or completed the course(s) and the student was unable to transfer all or any portion of the credits that would have been received to a second institution.  Whether or not this type of situation would allow the loans to be discharged would in all probability depend on the relationship between the financial institution making the loan and the educational facility.

All of the above is complicated by a case decided by the Supreme Court commonly referred to as "Seminole".  The case limits the Bankruptcy Court's jurisdiction to decide certain issues if they only involve States rights.  Therefore, if the student loan referred to is made by a state institution and does not involve any federal institutions, the court may not have the power to hear and determine any of the above.