Let's first start with what happens when a debtor files for and is granted a discharge in a Chapter 7 case. In this instance all dischargeable contracts become null and void and any remaining claims on these contracts are no longer the debtor's legal responsibility. However, a debtor may choose to keep some of his contractual obligations after the filing of a Chapter 7 bankruptcy. Enter reaffirmation agreements:
11 U.S.C. § 524.
"(c) 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--
(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;"
In essence, Section 524(c)(3) speaks of reaffirming or (reviving dead contracts after filing a bankruptcy on things debtor wants to keep and continue to pay for).
In conjunction with this rule:
"Fed. R. Bankr. P. 9011(b) provides that by presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, that: (1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation; (2) the claims, defense, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief." In re Melendez, 224 B.R. 252, (1998)
Violation of Rule 9011, like Rule 11 under the Federal Rule of Civil Procedure, can lead to sanctions against the certifying attorney.
"Bankruptcy Rule 9011 applies to attorneys' reaffirmation declarations pursuant to 11 USCS § 524(c)(3); in order to properly evaluate Rule 9011 issues, the court must determine in each case what facts were at disposal of debtor's counsel, what information was supplied by debtor, and whether attorney's inquiry was reasonable under the circumstances.
Attorney declarations must be struck and reaffirmation agreements annulled where declarations are incorrect as to factual content and were not made in accordance with declarants' obligations under FRBP Rule 9011; Rule 9011 requires attorney to make reasonable inquiry based on totality of surrounding circumstances regarding reaffirmation of debt and attorney should analyze income and expenses of debtor's household and necessity of debtor's retention of property to determine if reaffirmation would impose undue hardship; debtor's counsel must review any contract granting creditor security interest in collateral, determine validity of security interest, and determine if security interest is avoidable pursuant to 11 USCS § 522(f); counsel must communicate to debtor, in lay terms, financial terms of reaffirmation agreement; and counsel must determine risk of replevin if debt is not reaffirmed." Id. Melendez
Other Bankruptcy Courts have chimed in on the issue and even disgorged attorney fees paid exclusively for reaffirmation services: "where attorney failed to make inquiry into debtor's financial status but still certified reaffirmation. In re Vargas (2001, BC DC NJ) 257 BR 157, 37 BCD 53. ; where Chapter 7 debtor's attorney claimed, without any legal support, that debtor could retain real estate serving as collateral for creditor's mortgage without reaffirmation or redemption, later negotiated execution of reaffirmation agreement but, when requested to sign attorney declaration, refused on grounds that he had been neither retained nor authorized to do so, he was sanctioned under Fed. R. Bankr. P. 9011(c)(2) and ordered to pay $ 500 to creditor's attorneys." In re Baucom (2004, BC SD Ill) 305 BR 712.
When a client hires a bankruptcy attorney, the certifying of reaffirmation agreements is not part of the general services provided for purposes of filing the Chapter 7.
11 U.S.C.S. § 524(d)(2) further states that an "attorney is not required or obliged to sign attorney declaration re: debtor's ability to reaffirm." Meaning that an attorney has no duty to certify a client's reaffirmation. This does not mean that a debtor cannot attempt to reaffirm their debts on their own. This requires that they sign the reaffirmation after the filing of the bankruptcy, that the creditor accept the agreement (why wouldn't they?) and finally that the Bankruptcy Judge accept the argument made with the reaffirmation agreement (namely, that by signing such, the reaffirmation will be in the best interest of and will not impose an undue hardship on the debtor). However, an attorney certifying that a debtor's reaffirmation will be in the best interest is something that can carry consequences in the future for both the client and the attorney. The consequences for the client include failure to fulfill terms of contract and falling into breach and legal collection of the debt. Consequences for the certifying attorney include court sanctions and disgorgement of fees and this risk is far too high for most attorneys to certify reaffirmations.
That said, it is important to note in light of recent rulings in the 9th Circuit, that reaffirmations have more power today than before. In other words, debtors who seek to keep financed or leased cars post Chapter 7 filing will more than likely be forced to reaffirm or surrender the vehicle. When the vehicle is severely upside down, I, for one, would think twice before deciding to reaffirm such a debt. That is the first sign that such an agreement may not be in a debtor's best interest. Sometimes, if the original interest was very high (think loan sharks), then the finance company may attempt to entice a debtor into reaffirming the debt at a lower interest rate. Otherwise, the terms of the old contract remain the same.
Of course the question always comes up: if not this car, who then will finance or lease to us? You would be surprised just how many doors will open if only you are diligent in knocking. But if you believe it in your best interest to keep your current car, my advice is to stay current on all payments and consider reaffirming the debt after filing for bankruptcy.