Creditors Beware Tying Reaffirmations to New Credit Can Violate Automatic Stay

Creditors Beware Tying Reaffirmations to New Credit Can Violate Automatic Stay

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Tying approval of a debtor's reaffirmation of mortgage debt to the reaffirmation of other unsecured debt violates the automatic stay, according to a recent decision in the First Circuit. In re Jamo, 262 B.R. 159 (1st Cir. BAP 2001). The remedy for that stay violation can be quite painful to the over-aggressive creditor. Permissible conduct for a creditor seeking to obtain reaffirmation of a debt has been the subject of several reported opinions.

Reaffirmation and the Automatic Stay

As noted by Thomas E. Ray in this column in March 2001, reaffirmations are not looked upon favorably by the courts; however once properly agreed to, a reaffirmation agreement is very difficult to rescind. Reaffirmation agreements arose in their present form in the Bankruptcy Code of 1978, and their prior history is set forth in In re Oliver, 99 B.R. 73 (Bankr. W.D. Okla. 1989). "Section 524(c) authorizes a chapter 7 debtor to seek renegotiation of the terms of the security agreement with the creditor, thereby creating an alternative method pursuant to which a debtor may attempt to retain possession of secured collateral." In re Bell, 700 F.2d 1053, 1056 (6th Cir. 1983). This negotiation is a voluntary undertaking by both the debtor and the creditor, and inter-party communication is a basic element of negotiation. On the other hand, ß362(a)(6) prohibits "any act to collect, assess or recover a claim against the debtor that arose before the commencement of the case."

Since a literal interpretation of these Code provisions makes enforcement impractical, most courts have held that creditors do not violate the automatic stay by attempting to obtain a reaffirmation agreement. In re Briggs, 143 B.R. 438 (Bankr. E.D. Mich. 1992). On the other hand, these attempts cannot violate the spirit of ß362, the purpose of which is to prevent harassment of the debtor. Certainly illegal or coercive conduct meets the criteria. In re Briggs, supra, discusses the aspects of "coercion" and whether administrative freezes on accounts, repossession threats and other actions are violations of the automatic stay. Interestingly, the Briggs court found nothing improper in the creditor's actions requiring the debtor to reaffirm both a secured and an unsecured loan before the creditor consents to reaffirmation.

Tying Reaffirmation to Additional Credit

The Seventh Circuit has also analyzed the tension between the automatic stay and reaffirmation. In re Duke, 79 F.3d 43 (7th Cir. 1996). Agreeing with a majority of bankruptcy courts, the court noted that a letter to a debtor offering to reaffirm a pre-petition debt is not a violation of ß362(a)(6). In the Duke case, the letter from Sears also offered a credit line upon reaffirmation and sent a copy of the letter addressed to the attorney directly to the debtor. The Seventh Circuit found the letter not to be inherently coercive by "extending a carrot" because there was not even a hint of unfavorable action if reaffirmation was not agreed to. In re Duke at 46. This conclusion was also reached on another "...mere request to reaffirm the debt, absent additional facts...." Bessette v. AVCO, 240 B.R. 147, 158 (D. R.I. 1999). The means of making the request may be critical. Direct telephone contact to a debtor represented by counsel for the purpose of obtaining a reaffirmation has been found sanctionable under ß362(a)(6). In re Flynn, 143 B.R. 798, 802-803 (Bankr. D. R.I. 1992).

Tying Reaffirmation to Other Unsecured Debt

Noting all of these decisions and others, the First Circuit in In re Jamo talked about the freedom of the parties to discuss any contemplated agreement or to decline to enter into an agreement. While a creditor has no duty to execute a reaffirmation agreement and may refuse do to so for any lawful reason or even no reason, the creditor may not violate the debtor's rights. "Refusing to execute a reaffirmation agreement unless the dischargeable unsecured debt [is] paid act which violates the statutory rights of the debtor." In re Green, 15 B.R. 75, 78 (Bankr. S.D. Ohio 1981).

The First Circuit agreed and concluded that a creditor's refusal to execute a reaffirmation agreement unless dischargeable unsecured debt is paid violates the debtor's statutory rights. In re Jamo, p. 165. The court found that the In re Briggs analysis did not apply where the creditor is holding the homestead hostage for reaffirmation of unsecured and unrelated debts. This action went impermissibly beyond negotiating reaffirmation, and the First Circuit concluded that a willful and knowing violation of the stay occurred. For that reason, the court upheld the bankruptcy court decision, which enjoined the creditor from foreclosing on the home for one year, gave debtors one year to cure defaults and awarded debtor's attorney fees.


Creditors are entitled to ask the debtor's attorney for reaffirmation in correspondence copied to the debtor. They can make an offer more attractive by adding a credit enhancement. Creditors are warned not to use the reaffirmation process to force the debtor to pay otherwise dischargeable debt by tying it to beneficial secured debt.

Journal Date: 
Saturday, December 1, 2001