Debts forgiven, not forgotten:
Creditors may still be after you
By Holden Lewis • Bankrate.com

Two weeks after she filed for bankruptcy, Hilda Nolan was contacted by her credit union, The Golden 1. The largest credit union in California told the Sacramento-area accounting clerk that she should do the right thing: repay a portion of the car loan and other debts that had been wiped out in her Chapter 7 bankruptcy. "They told her they'd come back and take her car away and they told her they'd kick her out of the credit union," says Nolan's attorney, George Hollister.

It was Nolan's introduction to the world of reaffirmation, when lenders, often preying on bankrupt debtors' shame, persuade them to repay loans on unsecured debt -- loans they don't have to repay.

Not a good idea
"Reaffirmation is unwise because it keeps you on the hook," says Gary Klein, a senior attorney with the National Consumer Law Center. It is only unwise for the debtor; it makes perfect sense for the lender

In Nolan's case, she had remained current with the payments on her 1994 Toyota Corolla, so it was in no danger of being repossessed, her attorney says, adding that some of the debt on the car had been forgiven. But the credit union persuaded her to repay the full amount anyway.

When a debtor is not represented by an attorney, lenders are required to submit reaffirmation agreements to the bankruptcy court to determine whether reaffirmation is in the best interests of the debtor. A court must approve the reaffirmation agreement before it becomes enforceable. When Nolan signed her reaffirmation agreement without seeking an attorney's advice, the bankruptcy courts in that part of California were rarely permitting them.

The Golden 1 didn't submit Nolan's reaffirmation agreement with the court, Hollister says. He filed a class-action lawsuit alleging that The Golden 1 did not submit about 250 reaffirmations to bankruptcy courts.

For its part, The Golden 1 says that a few members "may have understood that voluntary payment arrangements which they made to The Golden 1 constituted binding agreements even though they were not so intended by The Golden 1," according to a statement issued by executive vice president Jim Harris. To spare its members the cost of litigation, the credit union decided to negotiate a settlement without admitting wrongdoing, he says.

Department stores try reaffirmation, too
The Golden 1 hasn't been the only lender accused of failing to file reaffirmation agreements with bankruptcy courts. Since 1997, Sears, Federated Department Stores, General Electric Capital and Montgomery Ward Credit Corp. have settled multimillion-dollar class-action lawsuits brought by consumers who claimed that they had been tricked or bullied into reaffirming charge card debts.

What should you do if you have declared Chapter 7 bankruptcy and a creditor wants you to reaffirm a debt? Simple: Firmly and emphatically tell the creditor to deal with your bankruptcy attorney, not with you. Your attorney almost surely will tell the creditor to take a hike.

In 1998, Congress began debating bankruptcy reform, and liberal legislators such as Jerry Nadler, D-N.Y., tried to ban outright the practice of reaffirmation in Chapter 7. But reaffirmation survives in bankruptcy reform bills now before Congress. In fact, says Henry Sommer, a board member of the National Association of Consumer Bankruptcy Attorneys, the bills under consideration "are pretty much forcing them (reaffirmations) in some of these provisions."

Paying off the car
This is especially true in provisions having to do with car loans. Congress, sympathetic to the plight of lenders, proposes that a bankrupt debtor be required to pay the full amount of a car loan, even if the car isn't worth as much as the balance on the loan.

"It lets them say, 'You have to pay us $5,000 for a $2,500 car,'" Klein says.

That's because under Chapter 7, if you are "upside down" on your car payments -- that is, you owe more than the car is worth -- you don't have to pay the difference. For example, if you owe $10,000 on a car that's worth $6,000, you can pay the lender $6,000 in installments and the remaining $4,000 is written off. Or you can allow the car to be repossessed so you don't have to make payments. Either way, the lender usually loses money.

In the Senate's proposed version of bankruptcy reform, household goods are defined narrowly, so that items such as lawn mowers and gas grills could be subject to repossession if they were bought on a store charge card.

"The intention is not to take these items," Klein says. "The intention is to threaten people into not filing for a bankruptcy that is sorely needed."

Fear of repossession
It's unlikely that a store would really repossess a dilapidated lawnmower or a grease-stained grill, but it might threaten to do so, Sommer says. And some debtors, especially those who feel ashamed about discharging their debts, might respond to repossession threats by signing reaffirmation agreements.

As for Hilda Nolan, attorneys for her and The Golden 1 are close to a settlement, but aren't quite there, Hollister says.

And while Nolan still has her car, The Golden 1 followed up on its other threat.

"They kicked her out of the credit union," Hollister says, adding that he wants to get her reinstated as part of a settlement.

-- Posted: June 18, 1999