The form used for reaffirmation agreements will change as of December 1, 2009. Creditors filing reaffirmation agreements will be required to include a completed reaffirmation cover sheet with the filing of an agreement. The cover sheet is a two-page questionnaire filled out by debtors and creditors that discloses financial information necessary for the court to determine whether a reaffirmation agreement creates a presumption of undue hardship for the debtor. Hardship is presumed if a debtor shows negative monthly income and expenses on Part D of the reaffirmation agreement. If there is a difference between the income and expenses listed on schedules I & J of the petition and income and expenses listed on part D of the reaffirmation agreement cover sheet, the debtor is required to explain the difference. The debtor must answer two questions explaining the difference and certify through signature that the information is true and accurate.
The rule change is national and will affect reaffirmation agreements filed in all states. If the reaffirmation does not contain the cover sheet, the bankruptcy courts may reject it after December 1, 2009.
Currently in Ohio before filing a foreclosure action, the lender is not required to participate in a mediation program. This may soon change as Ohio State Representative Matthew Dolan proposed a bill in the Ohio House, which would make mediation mandatory before filing a foreclosure. Under House Bill 306, a lender would be required to come to the bargaining table before a foreclosure action is filed. If the lender refuses to mediate with the property owner, the foreclosure action could be dismissed. The rule for mandatory mediation would not apply to homes in foreclosure for delinquent property taxes, unoccupied residences, or foreclosure actions where the homeowner does not reply to the summons within 28 days of issuance. The bill requires that the mediation take place by a court appointed mediator within 60 days of receiving an answer to the foreclosure complaint. If the filer of the foreclosure action does not attend the mediation hearing, the court may dismiss the foreclosure complaint.
Under Bankruptcy law, a Chapter 7 Trustee acquires the rights of a bona fide purchaser for value upon the filing of a Chapter 7 petition. A bona fide purchaser takes real property subject only to liens that are properly perfected. In cases where a lender’s mortgage was not executed in accordance with Ohio law, the Trustee is able to set the mortgage aside and sell the property free and clear of the lien. The most common mistake that lenders make is not properly acknowledging the signatures of one or both of the debtors on the mortgage. Ohio law requires that signatures of the mortgagors be acknowledged in the presence of a notary public. Bankruptcy courts are routinely allowing Chapter 7 Trustees to avoid mortgages when the notary acknowledgment is not signed correctly.
This issue arose recently during a case in which I was defending a mortgage lender in an avoidance action by the Trustee. A husband and wife owned a piece of property jointly and granted my client a mortgage on the property to secure the loan. The wife signed the mortgage on behalf of the husband pursuant to a valid power of attorney. The wife subsequently filed a Chapter 7 bankruptcy. The Chapter 7 Trustee filed an adversary complaint alleging that the mortgage loan was avoidable as to the husband, because the notary acknowledgment clause did not reference the wife’s signature on behalf of the husband. The bankruptcy court ruled in my client’s favor, holding that the mortgage was signed pursuant to a power of attorney and that the notary’s acknowledgment of the wife’s signature was sufficient to convey the interest in the property.
Even though the bankruptcy court ruled in my client’s favor is this particular case, mortgage lenders need to be aware that Trustee’s are closely examining the notary acknowledgment section of mortgages. Creditors should consult legal counsel for advice on the execution of mortgages in their respective jurisdictions.
Most creditors are familiar with the phrase, “retain and pay”. The bankruptcy code provides for certain treatment of debt, which is secured by personal property in Chapter 7 bankruptcies. Specifically, the bankruptcy code provides that debtors must either reaffirm the existing debt, redeem the collateral or surrender the collateral (or assume or reject the lease.) Prior to the amendments of the bankruptcy code in 2005, most debtors opted for the unwritten fourth option, “retain and pay.”
However the 2005 amendment, “clearly provides that the debtor shall not only file a statement of intentions but also follow through with her express intent.” If the intent is not followed through by the debtor in the statutory number of days, the automatic stay terminates and the property is no longer property of the estate.
The Ninth Circuit Court of Appeals recently ruled that the “retain and pay” option is no longer viable. If a debtor opts for this unwritten alternative then the debtor will fail to meet his/her statutory obligation and the automatic stay will be terminated. The mere termination of the automatic stay, however, is not enough to authorize the Creditor to repossess the collateral.
In the case before the Ninth Circuit, the debtor’s failure to adhere to the code allowed for the stay’s termination. Once the stay is terminated, the right to repossess the collateral then goes to the parties’ contract, in conjunction with state law to determine when the debtor has a default on the automobile loan and if that default allows repossession. The debtor’s contract in the Ninth Circuit case contained an ipso facto clause that provided a default if the debtor filed for bankruptcy.
There is a bankruptcy code provision that, “generally renders unenforceable any contractual term which purports to create a default solely based on the commencement of a of a bankruptcy case.”(1) However, the 2005 amendment overrides the provision that renders ipso facto clauses unenforceable when debtors fail to state an applicable intention and also fail to perform that intention.
Learning Points
- Offer reaffirmation agreements (If a reaffirmation is offered but denied by the Bankruptcy Court then the creditor cannot repossess if debtors are current after bankruptcy)
- Contracts should contain ipso facto clauses
- Know your state law to make sure you can repossess the collateral
- The above statutory provisions only apply to personal property
(1) Dumont v. Ford Motor Credit Company, Appellate Case No. 08-60002 (September 15, 2009 9th Cir.)
