When BAPCA gutted the ipso facto clause, reaffirmation was left as the only way a debtor could be assured of retaining his wheels.
Car lenders took sides back then, then changed sides, on whether they would automatically repossess a vehicle when the debt was not reaffirmed. Some wanted the in terrorem effect of losing the car to spur reaffirmations and the full panoply of legal remedies.
Others calculated they were better off having with a stream of payments than a used car.
Debtors worried that the act of filing bankruptcy could leave them with neither wheels or the reasonable prospect of buying replacement transportation.
In considering reaffirmation, debtors clutched the prospect of reaffirmation forming the basis for rebuilding credit. After all, the car debt was a loan they already had, and proposed to continue paying. That should be worth some credit score point, eh?
That’s until the court in Anzaldo dug into the effect of reaffirmation on credit.
Not only did the judge conclude there was little likelihood that reaffirmation would redound to the benefit of Debtor’s credit score, she dinged debtor’s counsel for not mastering the mysteries of credit scoring. Credit scoring about which, after multiple hearings and expert testimony, she still couldn’t get clear answers from the bank and its expert.
The lay of the legal land
The facts of Anzaldo are both simple and familiar. The debtor was a single parent of two kids, making about $23,000 a year, and commuting 40 miles to work in a world where there was no public transportation.
The car was a 6 year old Honda with a Blue Book value of $11,000 and a loan balance of $14,000 owed to Wells Fargo.
Her monthly budget, submitted in support of reaffirmation, showed a $14 surplus after allowance for the car loan, achieved by underestimating her living expenses. Debtor’s counsel certified the reaffirmation agreement.
When Judge Mann set the matter for hearing, debtor’s counsel offered debtor’s twofold reasons for reaffirmation:
- she wanted to protect her car from repossession and
- she wanted to rebuild her credit score.
Counsel went on to report that, without reaffirmation, Wells Fargo would not report post petition payments on the car loan to the credit reporting agencies, a fact confirmed by the bank’s counsel.
In response to the OSC Judge Mann issued, Wells Fargo averred that it does not repossess cars as long as the payments are made, regardless of whether the debt was reaffirmed.
Would reaffirmation build credit
Wells Fargo’s credit expert testified that the impact of a reaffirmation agreement on a debtor’s credit score is none, or very low. And the risk of future missed payments clobbering the post petition credit score is significant.
An account included in bankruptcy is considered a major derogatory by FICO. As such, any positive payment history would not be evaluated by the scoring model.
At the conclusion of the hearing, Debtor’s attorney stated that he knew neither about Wells Fargo’s policy to not pick up cars if the payments were current nor about the effect of post petition payments on a borrower’s credit score.
Voicing sympathy about the burden imposed on counsel and the lack of reliable information about both credit reporting agencies and car lenders, Judge Mann nonetheless charged debtor’s counsel to decline to sign the certification and to report realistic budget information.
The court struck counsel’s certification of the agreement as both ill informed and violative of Rule 11, and declined to approve the reaffirmation
Ding, ding, ding
So, what did debtor’s counsel do here that was so inadequate?
In essence, Judge Mann found that counsel “understated” debtor’s ability to make the car payments and misinformed his client about the risk of repossession and the effect of post petition payments on her credit score. [ I would say that counsel “overstated” debtor’s ability to make the payments, had I been writing.]
Budget The judge pondered how Debtor could keep her living expenses almost $1400 below the median average and worried about the sustainability of her currently low rent.
Repossession Judge Mann, after benefit of briefings and hearings, determined that Wells Fargo’s policy, today, as reported by these witnesses, was not to repossess cars where the loan was not reaffirmed.
Risk of deficiency judgment Citing Parker, the judge found that counsel had failed to give “due consideration” in making the certification to the adverse consequences of a deficiency judgment, when the car was overencumbered and the budget thin.
Credit score And again, after multiple proceedings, Judge Mann dinged counsel for not disabusing the debtor of her expectation that reaffirmation would benefit her credit score.
What’s debtor’s counsel to do?
While I’m ecstatic that Judge Mann made a persistent effort to get to the bottom of credit scoring, I can’t help but feel that the standards she held debtor’s counsel to are neither realistic nor fair. (You might say that little about BAPCPA is fair). Here’s why I respectfully disagree.
As debtor’s counsel, I’m profoundly reluctant to base my advice to clients on what banks and car lenders say about their repossession policies. Who do I ask about that? Are they a reliable source? What are the chances the policy changes?
Post petition credit issues loom large for our clients, for sure. Again, how are debtor’s counsel to dig out enough details about credit scoring at any given moment to be competent to advise a client on the issue. Using her power to issue orders to show cause still didn’t get Judge Mann clear answers to her questions about credit reporting. I lack that power, even if I assumed it would be sufficient.
And then, there is the practical problem about poverty. Ms. Anzaldo, fully employed, is just barely above the federal poverty line. Even the poor need transportation. And transportation is an essential if she’s to keep her job, and feed her kids.
Posit the situation where the lender can or does repossess cars not subject to a reaffirmation agreement. What are the market options for replacement transportation, fresh out of bankruptcy and barely above the poverty line? What sort of hardship would be imposed by such a replacement loan?
As the judge notes, in the 9th Circuit, we have the benefit of Moustafi, holding that all that BAPCPA requires of debtors is to be willing to reaffirm the loan to be entitled to ride-through. Make the payments, keep the car, even if the reaffirmation agreement is not approved.
Are there any penalties for debtor’s counsel in simply refusing as a matter of policy to certify a reaffirmation agreement? That seems like a breach of the duties to the client as well, but it seems to be the logical teaching of Anzaldo.