Reaffirmation Discussion: Can the auto lender pick up the vehicle after the Court refuses to approve the reaffirmation? Prof. Scarberry thinks so.

From a discussion from another listserve: (Remember Prof. Scarberry is brilliant but creditor oriented).


Looking for some suggestions.  We’re finding that most car lenders won’t repo and will accept tender of payments if debtors comply with all requirements of 362(h) and 521(a)(2) but the reaff is denied based on undue hardship.  One lender – San Diego County Credit Union – simply refuses tender of payment after the reaff is denied, and then picks up the car after discharge.

For those of you at NACBA in San Antonio less than two months ago, Bankruptcy Judge Eileen Hollowell of Arizona spoke on reaffs and “ride through”.  Her Moustafi opinion essentially allows ride-through in the above circumstances, and her form Order was included in the NACBA materials.  In her form order, she specifically orders the creditor to continue accepting payments.

Here’s where I get lost.  Last year, there was a San Diego County Credit Union case that went up to the BAP.  Judge Hollowell was on that BAP panel which held that:

…a creditor does not violate the Bankruptcy Code by refusing to accept payments tendered by a debtor. Additionally, we did not find any other federal law that may apply.

If 521(d) (which makes ipso facto default clauses unenforceable) is inapplicable in a case because debtors have fully complied with 362(h) and 521(a)(2), isn’t acceptance of tender implicit – even mandatory – in the terms of an otherwise enforceable contract?

I now have a debtor with a denied reaff, sufficient funds in my trust account from every post-petition refusal of tender, and a guaranteed repo in a few days when the discharge issues.

Gary Holt
San Diego

I would file an AP now seeking to enforce the stay and enjoin the repo, with a motion for TRO and preliminary injunction, citing those cases (starting w/  ED Va.’s Huasain opinion) that hold that a denied reaff is still compliance by the debtor and thus does not end the stay or the ipso facto prohibition, so you have a situation like a pre-BAPCPA ride through, which I believe was allowed in the 9th.

Dan Press Chung & Press, P.C.


Under section 362(h)(1)(B), it appears that the automatic stay ends if the creditor is willing to enter into the reaffirmation but for some other reason (e.g., the judge’s refusal to approve reaffirmation), the reaffirmation does not occur.  Note the language: “unless such statement specifies the debtor’s intention to reaffirm such debt on the original contract terms and the creditor refuses to agree to the reaffirmation on such terms.”  It appears that it is a refusal by the creditor to agree to the reaffirmation that would cause the stay to remain in effect.

Section 521(d) does not generally make ipso facto clauses unenforceable.  The last sentence of the section states, “Nothing in this subsection shall be deemed to justify limiting such a provision in any other circumstance.”

Further, the reference in section 521(d) to section 362(h) arguably incorporates the provision of section 362(h) that I discussed in the first paragraph of this email. (Note that section 362(h)(1)(B) appears to treat the debtor as having failed to take the action specified in the debtor’s statement of an intent to reaffirm where not reaffirmation occurs, unless the creditor refuses to enter into the reaffirmation.) If so, then section 521(d) makes ipso facto clauses enforceable where the creditor has not refused to enter into the reaffirmation agreement.

A question for Gary: Was the debtor in default prepetition on the car payments, such that the default is not merely a default under the ipso facto clause?

Best wishes, Mark

Mark S. Scarberry Professor of Law Pepperdine Univ. School of Law


It’s not a question of refusal to enter into a reaff.    It’s the effect of disapproval.  The majority rule is that if the debtor and creditor sign and the court disapproves it, the reaff is ineffective to reimpose personal liability but the provisions in 362 and 521 ending the stay and validating ipso facto clauses do not apply.  So the question then is whether ipso facto clauses are valid or not, and the pre-BAPCPA rule in the 9th (and 4th) is that they are not.

Dan Press


But it appears that sections 362(h)(1)(B) and (at least arguably) 521(d) validate ipso facto clauses unless the creditor’s refusal is the reason why a reaffirmation that preserves personal liability does not occur.

Mark S. Scarberry Professor of Law Pepperdine Univ. School of Law


Mark, all of the cases I’ve seen like Moustafi (Arizona) and Husain (ED VA) hold that the ipso facto clause is revived only if the debtor fails to timely file his Statement of Intention and fails to timely sign and send the executed reaffirmation agreement to the creditor for filing. The majority of cases have held that if done within the prescribed time periods, signing and returning the executed reaff to the creditor is, under 362(h)(1)(B) “…tak[ing] timely the action specified in such statement…”.

Case law has pretty much beaten the 362 issue to death on the subject of personal property reaffs, and most of us practitioners are seeing lenders comport themselves as though they recognize that the stay remains in place.

The new wrinkle – and the one with this particular credit union – is the refusal to accept tender of payment, thereby creating a payment default where the ipso facto default would not otherwise be implicated because the debtor’s full compliance with 362(h)(1)(B) and 521(d) did not “revive” the ipso facto provision.  Clearly, 524(l) was intended to give creditors some form of assurance that their acceptance of payments – either before or after a reaff is filed – does not get them in hot water.

So, the issue remains:  Where debtors were not in payment default prepetition, and there were no other stay issues before discharge because debtor had fully complied with 362/521, what do you call the creditor’s post-discharge creation of a default by refusing tender of payment?

Gary Holt


Some thoughts in response to Gary’s helpful post. Sorry for the length.

I’m familiar with Moustafi and with what the Fourth Circuit in the Jones case (591 F3d 308) called the “back door ride-through option” (though the court did not reach the question whether it exists).

I have been unable to find any circuit-level authority on this “back door ride-through option.” I think bankruptcy courts often interpret the Code in dubious ways.  (Consider, for example, the courts that hold that the claim must be for the entire original purchase price to be a claim for the purchase price within the meaning of section 521(a)(6).)  I think we all know that bankruptcy courts sometimes interpret the Code in ways that courts of appeals and the S. Ct. may find wanting.

Note that there seem to be some limits on this “back door ride-through option,” even where it is accepted.  There is authority that the option is not available if the debtor enters into the reaffirmation agreement knowing that there is “no basis for persuading the court to overrule a presumption of undue hardship.”  In re Milby, 389 B.R. 466 (Bankr. W.D. Va. 2008).   See also In re Donald, 343 B.R. 524 (Bankr. E.D.N.C. 2006) (dictum, I think) (rejecting debtor’s argument that (1) entering into a reaffirmation agreement and (2) whether it is ultimately enforceable are entirely separate, and saying that in the circumstances of the case accepting the argument would “abrogate[e] the requirements” of sections 362(h) and 521(d)). In Chim, the debtor tried to rebut the presumption of undue hardship, and the court found that  the debtor had entered into the reaffirmation agreement in good faith.  In Husain, the debtors did try to rebut the presumption, and the court stated (citing Donald approvingly) that

“The Debtors in the case at bar did everything in their capacity to perform. [fn 14]  They entered into the reaffirmation Agreements in good faith, and the creditors have agreed to give them, despite their projected budget shortfalls, a chance to make the required payments so that they can keep their vehicles.”

Footnote 14: “In some circumstances, a reaffirmation agreement entered into by the debtor in good faith may satisfy the requirements of §§ 362(h), 521(a)(6) and 521(d) where the court disapproves the reaffirmation agreement under § 524(c)(6), especially where, as here, the debtor intends to perform under the reaffirmation agreement and where disapproval by the court is beyond the debtor’s control.”  In re Donald, 343 B.R. 524, 541 (Bankr.E.D.N.C.2006).”

Note again the court’s limitation on the use of this kind of ride through.  The debtors in Coastal Fed. Cred. Union v. Hardiman also tried to convince the bankruptcy court that they could make the payments without undue hardship.

All of this may limit the strategic use of reaffirmation agreements that the debtor or attorney know will not be approved. Some of you will know more about whether such strategies are being used, but here is one description from Duhl, DIVIDED LOYALTIES: THE ATTORNEY’S ROLE IN BANKRUPTCY REAFFIRMATIONS, 84 Am. Bankr. L.J. 361, 388 (2010):

“In some jurisdictions, the practice exists for attorneys to encourage their clients to represent themselves pro se on reaffirmation agreements, count on the court to disapprove the reaffirmation because the attorney has not signed the certifications and the reaffirmation would impose an “undue hardship on the debtor” and is not in the debtor’s “best interest,” and therefore enable the debtor to ride through on the debt as long as she has filed a statement of her intention to reaffirm [FN143] and has timely entered into the reaffirmation agreement. [FN144]”

“Fn. 144. See Austin & Lassman, supra note 4, at 10 (“Consumer bankruptcy attorneys … may intentionally file reaffirmation agreements, with or without attorney certification, knowing that the agreement is likely to be rejected by the court. By doing so, debtors can be found to have complied with the requirements of § 521, but without termination of the automatic stay under § 362(h).”). One attorney advertises that he encourages his clients to follow what is, in effect, a back-door route to “ride-through.” See Russell A. DeMott, Bankruptcy Reaffirmation Agreements (Part Four), Charleston Bankr. Blog, (last visited June 10, 2010) (“And that’s the beauty of it.  We don’t really want the reaffirmation agreement to get approved.  You only have to sign the reaffirmation, not get it approved!  We go to the hearing, ask the judge to approve it, the judge declines it, but the judge also rules that the debtor did his duty and entered into the agreement.  Our judges will further rule that since the debtor entered into the agreement, the creditor can’t repossess the vehicle.  In legal terms the ipso facto clause–the clause in the contract that says bankruptcy is a term of default–is not operational.”).”

Let me recap where we seem to be.

If the creditor refuses to agree to the offer of reaffirmation, then the creditor does not receive the section 521(d) safe harbor protection of its rights under the ipso facto clause. Fine so far; the creditor is rejecting the debtor’s offer to remain personally liable, and then we let the chips fall where they may, under the courts’ view, without regard to section 521(d), of whether ipso facto clauses are enforceable in such circumstances. We may disagree about whether anything in the Code precludes application of an ipso facto clause in these cases (which are outside the context of executory contracts despite some courts’ citation to section 365(e) and do not involve property of the estate issues under section 541(c) etc.). We do know, from the last sentence of section 521(d), that section 521(d) does *not* resolve that disagreement in favor of *unenforceability* of ipso facto clauses.

Now suppose the debtor is willing to reaffirm. And suppose the court takes the view that ipso facto clauses are unenforceable in these circumstances unless protected by section 521(d). (If the court takes the opposite view, then there is nothing more to discuss.)

So, assuming the court will find the ipso facto clause unenforceable absent protection by section 521(d), here is the analysis that follows from Gary’s position:

If the creditor agrees to the offer of reaffirmation, then the creditor still does not receive the section 521(d) safe harbor protection of its rights under the ipso facto clause, until and unless the court approves the reaffirmation. (I’m assuming the reaffirmation is subject to the court’s approval under section 524(c)(6).)

For the court to approve the reaffirmation, the court must find inter alia that the reaffirmation is in the debtor’s best interest.  But how could the reaffirmation be in the debtor’s best interest if the only effect of the court’s approval of it is that the debtor remains personally liable on the car loan?  That is, if the court disapproves, the debtor still gets to keep the car, because, as we have assumed, the court will treat the ipso facto clause as unenforceable absent section 521(d) protection of it.  So why in the world would the court ever approve the reaffirmation?

I suppose the only way out of this dilemma would be for the court, in deciding whether to approve the reaffirmation, to ignore the benefit the debtor would get in terms of nonrecourse ride-through from the court’s refusal to approve it.  The court in Donald seemingly took that approach; the court rejected the debtors’ argument that reaffirmation could not be in their best interest because they could use ride through even if the court refused to approve the reaffirmation agreement. The court then approved the reaffirmation agreement. (There is one other case or article, sorry but again I can’t remember the name, that seemed to say that of course an attorney could not provide the needed declaration and of course the court would not approve a reaff as being in the debtor’s best interest if the debtor could still keep the car without approval of the reaff agreement.)

The curious result of this approach is that the only debtors who could use this kind of ride-through (where the reaffirmation agreement is not approved) are the ones who can’t afford to make the payments without undue hardship or for whom reaffirmation would not be in their best interest. That outcome seems to put the lender in a precarious position, with loss of recourse where the debtors are most likely not to keep up the payments.  This point was made in a Western New England Law Review note, 33 W. New Eng. L. Rev. 657, 692 (2011). (There are some other debtors who might be in a better financial position; one case I read, sorry but I can’t remember the name, noted that the reaff agreement might be rejected simply because the disclosures were insufficient or because the attorney failed to file the needed declaration, if the attorney represented the debtor with respect to the reaff agreement.)

Here the policy behind the Code seems to be that if the loan is changed from a recourse to a nonrecourse loan even though the lender was willing to enter into a reaffirmation agreement, then the creditor gets to enforce the ipso facto clause (to the extent it is enforceable under state law). On the other hand, if the lender refuses to agree to allow the debtor to reaffirm, then the lender does not receive safe harbor protection of its ipso facto clause and may find that it is unenforceable.

To give the court the ability to decide in effect that the ipso facto clause is not enforceable, despite the lender’s willingness to enter into a reaffirmation agreement, is contrary to the apparent purposes of these provisions.

On the specific question as framed by Gary, if the debtor is not in default, except under the ipso facto clause, and if the ipso facto clause is unenforceable as a matter of federal law, then the lender cannot create a default by refusing to accept a tender of a regular payment.  A lender who repossessed the car absent default (and thus absent authorization by UCC section 9-609) would commit the tort of conversion.

It is harder for me to see that there is a violation of the discharge injunction where the creditor only moves against the collateral.  See section 524(a)(2) (prohibiting attempts to collect a discharged debt as a personal liability of the debtor). Perhaps I’m missing something as I write this, since it’s quite late at night.  Certainly some courts find a violation of the discharge injunction in such cases.  It seems to me that instead, if the ipso facto clause in such cases is rendered unenforceable as a matter of federal law, there simply is no default if the debtor keeps up the payments, insurance, etc., and thus a repo of the car would violate state law and expose the creditor to liability for conversion and for other state law claims.

Mark S. Scarberry Professor of Law Pepperdine Univ. School of Law


This is a fascinating discussion.  I really enjoy Prof. Scarberry’s analysis.  As a diehard debtor’s atty, I hate to say I think he’s right.  I believe several judges in the Central District routinely deny most requests.  I believe a few judges believe that denial of the reaffirmation results essentially in a “ride-through.”   Jon Hayes

3 Replies to Reaffirmation Discussion: Can the auto lender pick up the vehicle after the Court refuses to approve the reaffirmation? Prof. Scarberry thinks so.

  1. Russ DeMott says:

    I’m referred to as the attorney who “advertises that he encourages his clients to follow what is, in effect, a back-door route to “ride-through.” I’d like to point out that that’s incorrect. What I really encourage clients to do it to simply pay “like clockwork” and not sign reaffirmation agreements. (If you read the entire blog post, that’s clear.) That’s not because I take issue with the concept of reaffirmation; it’s because it’s impossible to get reaffirmations entered, and because creditors won’t repossess vehicles where payments are being made on time.

    Prior to 2005 and the enactment of BAPCPA (and these absurd changes to section 524), I practiced in the 6th Circuit. The rule was clear in that circuit back then. There was no ride through. Debtors had three choices: surrender, reaffirm, or redeem. Creditors presented reaffirmation agreements to debtors, they were signed and entered. Everyone I knew seemed satisfied with this procedure, and it worked. Then came BAPCPA and this nonsense about requiring debtors to rebut the presumption of abuse–defined as expenses exceeding income. The obvious problem with this change is that expenses exceed income in almost every chapter 7 filed. I’ve only had 3-4 reaffirmation hearings in the last few years. Almost all clients simply pay and retain, and I’ve never heard of a creditor repossessing a vehicle because a reaffirmation wasn’t signed or entered. Why would any creditor repossess a vehicle in which payments are current?

    But if I have a client who wants the protection of section 524 (as interpreted in our district), the debtor can sign the agreement and send it in. We’ll then have the hearing where it’s rejected by the court. I don’t have to be upset at the fact that the reaffirmation is rejected by the court, and I’m not. The existence of the “back door ride-through” it’s the fault of those who purchased this legislation without any input from those of us who understood what would work and what would not.

  2. Hi everyone,
    My name is Magdalena Reyes Bordeaux and I am a senior staff attorney at Public Counsel and manage the Debtor Assistance Project. I have to disagree with Professor Scarberry’s position.

    I recently published an article on this issue and believe that the case law strongly supports the position that so long as the debtor has done everything they are supposed to do (ie. (1) indicated an intention to reaffirm; 2) cooperated with creditor counsel re: execution of reaffirmation agreement; and 3) attended the reaffirmation agreement, then denial of the agreement does not give the creditor the right to repossess the vehicle so long as the debtor is current with payments and insurance.

    A copy of the article can be accessed on the LACBA website on page 12.
    The article was recently published in the Practice Tips Section Volume 35.

    I tried to post it here but could not do so.

    Also, it is unclear when a reaffirmation agreement would be filed in “bad faith.” Debtors can no longer indicate an intention to continue making payment if they want to retain the vehicle. If the debtor wants to retain the vehicle, he has to select redeem or retain after BAPCPA or risk being vulnerable to a repossession by the creditor.

    It is hard for me to think the court would think a debtor is acting in “bad faith” by indicating an intention to reaffirm when the debtor is current on payments and insurance. The determination of “undue hardship” and “best interest of debtor” is one made by the judge not the debtor.

    Senior Staff Attorney
    Public Counsel
    Consumer Law Project/Debtor Assistance Project

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