Recent Entries

Reaffirming Unsecured Debt in Western District of Pennsylvania

Published on May 2, 2011 in Chapter 7. 0 Comments

By Keri P. Claeys, Esq.

Recently, lenders/credit unions in Pennsylvania have been advised by debtors of their intentions and wishes to reaffirm unsecured lines of credit and/or visa loans in order to maintain their good relationship with the lending institution. With increasingly stringent lending practices and approval on loans being harder to secure, debtors are doing so in the hopes that the debtor(s)’ bankruptcy filing does not affect their chances in the future with such lending institution to receive approval on additional loans.

Upon such requests being received, the lenders/credit unions have been requesting reaffirmation agreements be prepared and sent to the debtors(s) and/or their counsel for review and execution. If feasible, the debtors(s) and their counsels are executing such reaffirmation agreements, even though this technically thwarts the act of Chapter 7 bankruptcy itself; to discharge all unsecured debt and to allow the debtor a clean start.

The issue arises when the reaffirmation agreement is filed with the court.  The bankruptcy court in the Western District of Pennsylvania is declined to approve such reaffirmation agreements. The court is scheduling hearings on such agreements and even upon the agreement and recommendation of both parties and their counsels; the courts are not issuing orders to approve the reaffirmation of any unsecured debt. As explained by one judge in the Western District of PA, regardless of the reason for wanting to reaffirm, he would not approve (even if it did not pose an undue hardship on the debtor) an agreement to reaffirm an unsecured debt, as the debtor filed bankruptcy in order to discharge such debts. Generally, in his opinion, what would be the point of filing bankruptcy, if upon discharge the debtor still owed thousands of dollars in unsecured credit card debt? The judge went on to say that he could not see any instance where he would approve such an agreement.

Upon review of 11 U.S.C. §524(m)(1) and (2), the code is clear that approval based on presumption of undue hardship does not apply to credit unions. Whether or not these sections leave room for discretion for the judge to deny based not upon presumption of undue hardship but based solely upon the fact of the debt being unsecured is left undetermined and such order could be appealable.

While the good intentions of the debtor(s) may be to maintain responsibility for his/her debts to certain lenders/credit unions, and likewise of the lender to try and collect upon a debt that nonetheless would be discharged, the courts, regardless of the intentions and/or reasoning of the parties, are not willing to reach beyond and approve such agreements.

If you have any questions on this matter, please contact Ms. Keri P. Claeys, Esq. Keri is an associate in the bankruptcy group located in the Pittsburgh office of Weltman, Weinberg & Reis Co., LPA. She can be reached at 412-338-7102 or .

Change In Bankruptcy Rule Adds Reaffirmation Cover Sheet

Published on October 23, 2009 in Bankruptcy Act 2009 and Bankruptcy Filings. 0 Comments

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.

Paying Back the Loss: No Loss Policies and Member Bankruptcy

Published on June 9, 2009 in Bankruptcy Automatic Stay. 0 Comments

by Robert Rutkowski, Partner and Bryan Kostura, Associate

Many credit unions have no loss policies. When a member causes the credit union a loss, the member either loses services (down to a share account and the right to vote at meetings) or, in the case of some state credit unions, the member is expelled. At times, a member will come to grips with financial reality and seek rehabilitation. In most cases, all that is necessary to get back in the good graces of the credit union is to pay back the loss the member caused in the first instance. Unfortunately this simple concept becomes exponentially more difficult when the member is in the midst of a bankruptcy.  During those instances a credit union needs to walk a fine line between educating the member on how restore member benefits and active debt collection.  When a member asks the credit union, “How can I become a member again?” or “How can I get my services back?”, the response is easy: “Eliminate the loss.”  However if not done properly this could result in the well meaning credit union violating the Federal Bankruptcy Court Stay. 

The purpose of the automatic stay is to give a debtor a brief reprieve from creditors and prevent one creditor from rushing to enforce a lien to the detriment of other creditors. The stay protects the debtor and his creditors by allowing the debtor to organize his affairs, and ensures that the bankruptcy procedures operate to provide an orderly resolution of all claims.

Notwithstanding this prohibition against the collection of discharged debts, a debtor may repay debts that would otherwise be dischargeable, either by entering into a formal reaffirmation agreement or by making voluntary payments in the absence of such an agreement.

After bankruptcy debtors may repay debts as they choose without being legally obligated in the event they later become unable to fulfill their intention.

While repayment induced by harassment or duress by a creditor is clearly prohibited, it is unclear to what extent a debtor’s repayment must be free from external influences. One meaning of “voluntary” would require that the repayment be spontaneous, that is, induced by nothing other than the debtor’s own conscience. On the other hand, “voluntary” is often used to refer to actions resulting from one’s interest in experiencing gain or avoiding loss. Under this interpretation, voluntariness would be determined from the totality of circumstances surrounding the repayment.

With respect to credit unions specifically, courts have held that the mere cancellation of the debtor’s membership privileges, such as maintaining an interest-bearing share account for the debtor, or maintaining a checking account for the debtor, is not a withdrawal of privileges unique to union membership and therefore not so valuable as to be found coercive. However, where the creditor combines the cancellation with certain acts that result in the repayment of a discharged debt, those acts may violate the Bankruptcy Code.

Courts have discussed acts that go beyond mere cancellation. For example, a credit union violates the stay by terminating a debtor’s membership, refusing to accept his mortgage payments, and subsequently declaring the mortgage in default. Although terminating the debtor’s membership was not a coercive act, refusing mortgage payments and foreclosing on the mortgage was coercive.

Courts have consistently held that the mere cancellation of a debtor’s credit union membership, although perhaps against public policy to some extent, does not violate the automatic stay or the discharge injunction of (a) as an act to collect a dischargeable or discharged debt. When credit unions have a policy of terminating membership privileges to any member who caused it a loss, courts have held that this does not violate the automatic stay.

Courts have discussed whether notification of the credit union’s policy amounts to coercion. The consensus among the courts that have examined this issue is that it is not a violation. The rational is that nothing in the bankruptcy code requires a creditor to do business with a debtor; therefore, simply notifying a debtor of its policy is not a violation.

In summary, actions taken by a creditor in the process of seeking voluntary repayment of a post-petition indebtedness violates the bankruptcy code only if the action (1) could reasonably be expected to have a significant impact on the debtor’s determination as to whether to repay, and (2) is contrary to what a reasonable person would consider to be fair under the circumstances. Further, mere notice of a stop loss policy by a credit union does not violate Bankruptcy law, so long as the notice is not coupled with coercive acts.

If you have further questions or require additional explanation related to this topic Robert Rutkowski, Partner of WWR’s Credit Union Department or Bryan Kostura, Associate with WWR’s Bankruptcy Department would be happy to talk with you.