The Reaffirming Dead … (bankruptcy beyond the grave)

Company asks Bankruptcy Court to compel a dead man to surrender his home.

Although it sounds like the beginning of a spoof of a “Walking Dead” skit, the court in Florida took a serious look at the issue.

Dead serious…

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From the Middle District of Florida, In re Charles James McHale, Jr., and Susan McHale, Case #10-02527. Entered March 9, 2018:

Debtors filed this routine and uneventful Chapter 7 bankruptcy case over eight years ago on February 19, 2010. They received their discharge on July 1, 2010.  In their Statement of Intentions, the Debtors indicated they wanted to reaffirm the mortgage debt encumbering their home, which was held by Bank of America. Only the husband Debtor, Charles, signed the promissory note connected to the mortgage. The Debtor/wife, Susan, had no debt to reaffirm.

Bank of America never sent the husband a reaffirmation agreement for him to sign. Instead, the lender sent a letter to the Debtors’ lawyer inviting him to explore the bank’s “home retention programs” with his clients. Bank of America had actual knowledge of the bankruptcy filing but filed no proof of claim with the Bankruptcy Court and took no action in this Chapter 7 case.

Similarly, husband never prepared, signed, or filed any reaffirmation agreement with the Bankruptcy Court. But, he always acted consistently with his intent to reaffirm the debt. He was current with his payments when his bankruptcy case was filed and remained current when he received a discharge. He made multiple payments, all accepted by the lender, after his bankruptcy case was closed.

Trust acknowledges the Debtors were current on their mortgage payments when they filed bankruptcy on February 19, 2010, and they made all future payments through February 2011.  Husband, by this point, was dying. Because he could no longer earn his regular income and despite his declining medical condition, husband valiantly tried to restructure the loan.

Bank of America eventually offered a loan modification to Mr. McHale in August 2011. Debtors made ten full payments under the temporary loan modification agreement that was only supposed to last for three months. Bank of America accepted every payment, the last one being made by the Debtors’ daughter on May 23. Husband died on April 26, 2012.

Bank of America refused to accept any of the many later payments tendered by wife. The lender also refused to issue a permanent loan modification or to assist wife, the surviving Debtor, with restructuring the mortgage encumbering her home. The testimony was uncontroverted that wife, assisted by her family, was willing and able to continue paying for her home. Bank of America simply failed to work with their borrower’s widow.

Bank of America and later the Trust instead pursued two separate foreclosure actions against wife. The first foreclosure case was filed on January 4, 2013. Because the lender could not procure a witness to prove its alleged debt, Trust voluntarily dismissed the first foreclosure on October 3, 2014.

Trust filed a second foreclosure action on May 19, 2015. The second foreclosure action remains pending. Trust, not the wife, has asked to continue the trial in this second foreclosure case at least three times. Then, on June 18, 2016, almost six years after the Debtors received their discharge in this bankruptcy case and three and a half years after the initial foreclosure action was filed, Trust filed its motion to reopen this closed Chapter 7 case.  Trust argues the Debtors did not properly reaffirm the debt then due to Bank of America, and the Bankruptcy Court should compel the surrender of the home.

Section 350(b) of the Bankruptcy Code allows a bankruptcy court to reopen a case for “cause.” Bankruptcy courts use their discretion to determine whether the moving party has demonstrated sufficient cause to reopen the case based on the circumstances and equities of the case. The decision to reopen a long-closed bankruptcy case rests on a balancing test weighing the benefits and prejudices to the creditors and the debtors as well as many other equitable factors. Courts also should consider the suitability of alternative forums and how long a movant waited to seek reopening, requiring a more compelling justification to reopen when the delay is extensive.

Under § 521(a)(2)(A) of the Bankruptcy Code, a Chapter 7 debtor who owes money to a secured creditor with a lien must decide whether they want to surrender the property secured by a lien or, if they would like to retain the property, whether they want to reaffirm or redeem the debt.

Debtors must choose one of these three options. They cannot simply continue making payments to the lender because it would allow them to turn a recourse loan into a non-recourse obligation giving them a “head start” instead of a “fresh start.” Here, Mr. McHale chose to reaffirm the debt due to Bank of America.

Section 524(c) of the Bankruptcy Code governs reaffirmation agreements and the reaffirmation process. Reaffirmation allows a debtor to reaffirm the debt it owes to a creditor and excuses that creditor’s debt from the debtor’s discharge. To reaffirm a debt, the parties must come to an agreement where the otherwise dischargeable debt is renegotiated. Section 524(c) provides certain requirements that must be met for a reaffirmation agreement to be valid and binding. For example, a reaffirmation agreement must be executed before the discharge is granted and certain disclosures must be made by the creditor that contain specific language outlined in the statute. “Case law construing § 524(c) … supports the conclusion that the requirements … must be strictly complied with in order for a reaffirmation agreement to be enforceable.” As Chief Bankruptcy Judge Williamson noted in the In re Pitts decision, it is up to the creditor to protect its own rights. If a debtor does not fully proceed through the reaffirmation process, the creditor should seek to ensure the agreement is properly executed.

But, § 521(a)(2)(B) of the Bankruptcy Code requires debtors to perform some act consistent with their stated intention within 45 days. Mr. McHale did not reaffirm the debt within 45 days. Mrs. McHale’s testimony was credible and unrebutted, however, that the Debtors’ lawyer never explained to Mr. McHale what he needed to do to reaffirm the mortgage debt. Nor did the lender take any action during the bankruptcy to compel Mr. McHale to sign a reaffirmation agreement or otherwise comply with his duties under § 521. Rather, both parties continued the status quo for years following the bankruptcy discharge and closing.

Mr. McHale made regular monthly payments to Bank of America. The lender accepted these payments and eventually modified the mortgage loan long after the bankruptcy case was closed. The lender has filed and dismissed one foreclosure action. A second, still-pending foreclosure action was filed. Christiana Trust waited until June 2016, almost six years after Mr. McHale received his bankruptcy discharge in July 2010, to ask the bankruptcy court to reopen this case to force the deceased Mr. McHale and his surviving widow to surrender the family home because Mr. McHale failed to sign a reaffirmation agreement.

The issue now is what relief, if any, is appropriate against Mr. McHale, his estate, and his widow, Mrs. McHale? Is there any relief possible against Mr. McHale or his estate for his failing to sign the reaffirmation agreement? Should I automatically compel the surviving widow, who never was obligated to reaffirm the debt, to surrender her defenses in the pending foreclosure action, as Christiana Trust seeks? Are there other factors that dictate another remedy or no relief?

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Read the answers to these excellent questions as the Order concludes here.

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Thanks for reading!

About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Centralia, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

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