I recently was approached by a former client who wanted to know how to deal with her former car financing company who was suing her for a deficiency balance after her car had been wrecked and she did not possess gap insurance.

This question came as quite a surprise to me given that I did not remember her reaffirming the debt in her chapter 7 bankruptcy. It had however been almost three years since her case was filed and over two years since it closed, so I was not too sure on the details. I pulled her case docket and sure enough, she had not reaffirmed.

I then took a look at the bank’s state court complaint and noticed that without my knowledge, they had my client sign a new promissory note in the middle of her case. This was not a reaffirmation agreement, since all reaffirmation agreements must be approved by the judge. Under 11 USC 524, a creditor must get the debtor to sign a reaffirmation agreement if the creditor wants to bind the debtor to the debt post bankruptcy, assuming it is for the same collateral as the pre bankruptcy note. This bank had skirted the reaffirmation process by getting the debtor to sign a new note that was not approved by the bankruptcy court.

So what was the end result of the creditor doing things the wrong way? I notified them that they must dismiss their suit, as it is a violation of the debtor’s discharge order. Furthermore, this debtor has grounds to bring an adversary proceeding against the bank for its violation of the discharge order and possible damage to the debtor’s credit.

The point to take away from all this is anytime the creditor does not get the debtor to sign a reaffirmation agreement during the pendency of the Chapter 7, the debt is forever discharged. The creditor still has its lien rights as to the collateral, but the debtor no longer can have personal liability.

By Peter Bricks, P.C.

With offices conveniently located in Atlanta, Cumming, Dunwoody, Jonesboro, and Woodstock.