LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

MARCH 11, 1999, THURSDAY

SECTION: IN THE NEWS

LENGTH: 1518 words

HEADLINE: PREPARED STATEMENT OF
HON. CAROL J. KENNER
UNITED STATES BANKRUPTCY JUDGE, DISTRICT OF MASSACHUSETTS
BEFORE THE HOUSE JUDICIARY COMMITTEE
COMMERCIAL AND ADMINISTRATIVE LAW SUBCOMMITTEE
AND THE SENATE JUDICIARY COMMITTEE
ADMINISTRATIVE OVERSIGHT AND THE COURTS SUBCOMMITTEE
SUBJECT - CONSUMER BANKRUPTCY LEGISLATION

BODY:

Mr. Chairmen and members of the Subcommittees, my name is Carol J. Kenner. I have served as a United States Bankruptcy Judge for the District of Massachusetts for the last 12 years and during that time presided over more than 35,000 bankruptcy cases. I am honored to be here today.
The current Bankruptcy Code, on the whole, is a well-balanced and well-conceived statute, given that it must arbitrate and balance the diverse needs of creditors, debtors and other constituencies. It works remarkably well. It is a law that Congress should be justifiably proud of because it provides an effective mechanism for paying dividends to creditors while affording debtors a fresh start. My purpose today is to offer observations, gleaned from daily administration of this law over the last twelve years, as to whether, in practice and with respect to discrete concerns, the current law is fulfilling the goals that Congress intended.
I would like to focus on the subject of reaffirmation agreements. A reaffirmation agreement is an agreement between a debtor and a creditor where the debtor agrees to pay a debt that would otherwise be entirely or partially discharged in the debtor's bankruptcy case. When Congress enacted the Bankruptcy Code, it sought to protect financially-burdened families seeking chapter 7 relief from compromising their fresh start by making unwise agreements to pay dischargeable debt.
For example, suppose the debtor files a chapter 7 case. At the meeting of creditors, a Bank creditor or credit card company asks the debtor if he wants to reaffirm his $3,000 unsecured debt in exchange for the Bank's agreeing to let him keep the credit card after the bankruptcy. By reaffirming the $3,000, the debtor is giving up his right to discharge that debt.
The reaffirmation agreement REVIVES the legal enforceability of the debt. So when a debtor chooses to reaffirm a debt, that agreement negates one of the primary goals of bankruptcy: giving the debtor a fresh start and enabling him or her to resume a role in the economic mainstream. Instead of exiting bankruptcy with a fresh start, the debtor remains liable on a debt that otherwise would have been wiped out.
Congress very wisely established safeguards that are intended to insure that debtors do not reaffirm debts imprudently and without full understanding of what they are doing. Most notable among these is the requirement that, before a reaffirmation agreement can become effective, the debtor's attorney must certify, or (if the debtor is not represented by counsel or counsel refuses to make the necessary certification) the Court must find, that-- * the agreement represents a fully informed and voluntary agreement by the debtor;
* the agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and
* the debtor has been fully advised of the legal effect and consequences of--
(i) a reaffirmation agreement and
(ii) any default under such an agreement.
As paternalistic as this safeguard may sound, experience demonstrates that it is necessary. Unfortunately, for various reasons, the present safeguard is not enough. The current law on reaffirmation agreements often does not fulfill the goals that Congress intended.
Debtors often make the decision to reaffirm (1) without understanding the legal effect of what they are doing, (2) without understanding its financial cost, and (3) without understanding their alternatives. Often, they must make the decision in intimidating circumstances. Often the creditor is suddenly threatening to repossess a necessary asset that the debtor can't afford to replace-such as the car they need to get to work or their family refrigerator. Debtors tell me that they feel intimidated by having to appear for their meeting of creditors (many reaffirmation agreements are obtained at the meeting of creditors) and by the creditor seeking the reaffirmance. Often they have no advance warning that they will have to face this issue. And often their attorney is not with them when the creditor approaches, if they have an attorney at all. Although the current statute gives debtors time to rescind agreements made imprudently and requires that the agreement advise the debtor of this option, the creditor does not leave a copy of the signed agreement with the debtor, so the debtor does not know of his or her option to rescind.
Another problem is that the requirement of the attorney declaration can drive a wedge between the attorney and client. The attorney may recognize that the client can't afford to pay the monthly charge, yet the client insists that the car or refrigerator is essential. Understandably, very few attorneys resolve this tension by standing firm against the client; most simply facilitate the client's decision to reaffirm by providing the necessary declaration.
Congress may want to consider the following:
* Today, a reaffirmation requires court approval only when the reaffirmation agreement is filed without an affidavit from the debtor's attorney. I believe Congress should consider requiring court approval for ALL reaffirmation agreements. I recognize that such a provision would place a burden on bankruptcy judges, but this is a burden I am willing to bear because it has such a substantial impact on whether our bankruptcy system fulfills its goal of providing debt relief to needy individuals and families.
* The financial impact of reaffirming a debt should be absolutely clear. Debtors need to know the principal amount of the debt, the interest rate, and the liquidation value of the collateral; and, most importantly, they need to know the bottom-line cost. Debtors need the same kinds of disclosures that Congress requires in the Truth-in- Lending law.
* Sometimes a debtor reaffirms an unsecured debt in the mistaken belief that it will permit him to obtain a line of credit in the future and that, otherwise, it will be difficult or impossible for him to obtain credit. This belief is inconsistent with my experience. Debtors' attorneys tell me that their clients are obtaining credit post-bankruptcy quite easily. And debtors can certainly use debit cards or secured credit cards if they need a card.
* Sometimes a debtor reaffirms a debt in response to a complaint by the creditor that the debt is nondischargeable on account of fraud. The best place for the Court to evaluate the merits of the reaffirmation agreement is in the context of an adversary proceeding to determine the dischargeability of the debt.
* The treatment of secured debt requires careful thought. A debtor who wants to keep household goods or his car needs to understand what his options are. Most don't appreciate that one of the options is redeeming the collateral. But, realistically can a debtor redeem the collateral, such as a car, by paying the creditor the current value of the car in cash, in one lump sum payment? Most debtors I hear from can't do so. They would have great difficulty in making lump sum payments-they live from hand to mouth, paycheck to paycheck. They could perhaps redeem over time-perhaps 6 months-but they simply cannot do so in a lump sum without taking food off the table for the family.
* Sometimes a debtor reaffirms a debt where the collateral is a household item such as a mattress or a crib. In those cases, there is rarely a market for such used goods and, as a practical matter, the likelihood that the creditor will foreclose is remote. I have trouble understanding why the creditor should be permitted to repossess the mattress and then merely cart it to the city dump.
* Proposed section 125 of H.R. 833 (formerly H.R. 3150) is problematic because it defines the value as the price a retail merchant would charge for property of that age and condition--but in fact there is rarely a market for such used household goods.
* The debtor needs to be given a copy of the executed reaffirmation agreement in order to better enable him or her (1) to reconsider the agreement and (2) to know of the option to rescind.
* If the debtor is reaffirming a debt that is entirely unsecured, the debtor should state why he or she is doing so.
* Sometimes a debtor reaffirms a debt in response to a creditor's threat to bring a nondischargeability action. In some cases there is little or no basis for such a suit. In order to evaluate whether that reaffirmation agreement is reasonable, the Court needs information from the parties. Many families in bankruptcy simply cannot afford to defend against claims of nondischargeability.
* Sometimes the debtor reaffirms an unsecured debt because his mother- in-law co-signed the loan and he wants to protect the guarantor. I can't understand why such a reaffirmation would ever be in the debtor's interest: nothing prevents him from voluntarily paying a debt that's been discharged in order to keep peace in the family, but he need not legally bind himself on the debt in order to do that.
As you consider the Bankruptcy Code and the need for reform, these are the concerns I would have you address. Thank you for your consideration.
END

LOAD-DATE: March 12, 1999