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GAO studies new reaffirmation agreements
WASHINGTON (12/18/07)--A Government Accountability Office (GAO) report recently stated that a survey of bankruptcy filings in five districts shows that new rules for reaffirmation agreements are being used in a significant majority of bankruptcy dealings. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act required lenders to better inform individuals filing for personal bankruptcy about their options for reaffirming debt by requiring extensive disclosures and possible court review. The “reaffirmation agreements” are voluntary and enable borrowers to pay certain creditors in order to keep an asset, such as an automobile. The 2005 law required the GAO to study the new reaffirmation process, and in its recent report Congress’ investigative arm looked at: the extent to which the required bankruptcy reform act disclosures have been incorporated into reaffirmation agreements; the types of debts generally reaffirmed and what percent of a debtor’s overall debt it represents; and how reaffirmed and original interest rates compare. The GAO said it reviewed a representative sample of over 1,000 reaffirmation agreements in bankruptcy courts in five state: Alabama, California, Illinois, Texas and West Virginia. The report noted the sample “cannot be generalized to all bankruptcy courts, but can be generalized to each of the selected bankruptcy courts.” The GAO found:
*For the five districts, the required disclosure statement for the “Annual Percentage Rate” was included in an estimated 86% to 97% of agreements and the disclosure statement for the “Amount Reaffirmed,” and the amount was included in an estimated 87% to 98% percent of agreements (the California court filings were consistently the highest in compliance); * For the five districts, debts secured by assets, such as an automobile, were the most frequently reaffirmed type of debt—comprising an estimated 90% or more of all reaffirmations. Unsecured debt—such as credit card debt—was reaffirmed infrequently in reaffirmation agreements, occurring in an estimated 2% to 10% of agreements. * In an estimated two-thirds (75%) of the bankruptcy cases in the five districts, the reaffirmed debt burden comprised 25% or less of the debtors’ total debts; and * In cases where an original interest rate was provided, rates on reaffirmed debt were generally less than or equal to the original rate. Credit union lending and collections staff may be particularly interested in pages 28-31 of the report addressing interest rates in reaffirmation agreements;
The report highlighted the different reaffirmation rules that apply to credit unions under the 2005 law, since the presumption of undue hardship when a debtor’s expenses exceed income are not applicable to credit unions if the debtor is represented by an attorney. Reaffirmation agreements with credit unions comprised an estimated 6% to 20% of all reaffirmations in each of the five districts. The GAO report indicated that the bankruptcy courts have under consideration a May 2007 recommendation by a federal judiciary advisory committee to require a reaffirmation agreement coversheet in order to simplify judges’ review of whether a hardship possibly exists with the debtor’s reaffirmation agreement. The Credit Union National Association is discussing with the courts’ administrative office under what conditions a credit union reaffirmation agreement would have to provide such a coversheet., but any change in paperwork requirements is not expected before late 2009. Last week, the various reports indicated that consumer bankruptcy filings across the country increased more than 28% in November from a year ago, but were down 5.5% from October. For more details of the GAO report, use the resource link below.
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