Often times creditors will send debtors a reaffirmation agreement in an attempt to assume a lease of personal property. This most commonly happens with vehicle and furniture leases. Not being the wiser, debtors’ counsel has their clients sign these reaffirmation agreements not knowing that they are null and void to effectuate a lease assumption. Under Title of 11 of the United States Code (“Bankruptcy Code”), there are two different and independent processes for reaffirming debts and assuming leases. “Section 524(c) of the Bankruptcy Code allows a debtor to voluntarily "reaffirm" their personal liability for a debt, and such debts are not discharged. Section 365(p) permits the assumption of a personal property lease by individual debtors in Chapter 7 cases. ” In re Kearns, Case No. 20-20252-BPH, (Bankr. D. Mont. Feb. 12, 2021).
In re Kearns, Debtor’s counsel submitted to the Court a reaffirmation agreement provided by a Creditor in an attempt to assume a lease for a 2019 Acura MDX. Judge Benjamin P. Hursh for the U.S. Bankruptcy Court for the District of Montana called a hearing on the reaffirmation agreement not only to resolve the matter before the Court but also as an opportunity to address an increasing problem seen by bankruptcy courts: reaffirmation agreements accompanied by leases. After denying the reaffirmation agreement, Judge Hursh penned a memorandum order to assist other bankruptcy practitioners. Judge Hursh explained the difference between Section 524(c) and Section 365(p) as follows:
Reaffirmation Agreements -Section 524(c)
“In chapter 7 cases, a debtor is typically "discharge[d]...from all debts that arose before the date of the order for relief" when a bankruptcy proceeding ends. § 727(b). However, § 524(c) provides "a limited exception to that rule by allowing an agreement 'based on a debt that is dischargeable' to be reaffirmed and thus remain enforceable after discharge." Bobka v. Toyota Motor Credit Corp., 968 F.3d 946, 950 (9th Cir. 2020) (quoting § 524(c)). "Because reaffirmation agreements are contrary to the stated goal of a debtor receiving a fresh start, they are subject to intense judicial scrutiny and must comply with all statutory requirements." In re Ebbrecht, 451 B.R. 241, 243 (Bankr. E.D.N.Y. 2011). For example, reaffirmation agreements must be filed and approved by the court prior to its granting of discharge. § 524(c)(1). Additionally, courts must ensure that a debtor bound by a reaffirmation agreement is aware of the legal consequences associated with the agreement and, if a debtor is pro se, ensure that the agreement does not impose an undue hardship on the debtor and is in their best interest. § 524(c)(2)-(6). Such statutory requirements appear nowhere in § 365(p).”[1]
Lease Assumptions -Section 365(p)
“Section 365(p)(2) describes a consensual procedure for the assumption of a personal property lease by a debtor that begins with the debtor transmitting a written offer to assume the lease obligations to the lessor. § 365(p)(2)(A). The Code does not require that this offer be transmitted within any specific time frame. Upon receipt, the lessor then decides whether to accept the offer. In re Anderson, 607 B.R. 133, 136 (Bankr. D. Mass 2019). […] If the lessor chooses to assume the lease, it then notifies the debtor that it is willing to permit the debtor to assume the lease "and may condition such assumption on cure of any outstanding default on terms set by the contract." Id. "If, not later than 30 days after notice is provided under [§365(p)(2)(A)], the debtor notifies the lessor in writing that the lease is assumed, the liability under the lease will be assumed by the debtor and not by the estate." § 365(p)(2)(A)[2].
In sum, Judge Hursh was emphasizing the fact that under the Bankruptcy Code the lease assumption process is completed exclusively between the creditor and debtor without Court involvement. Reaffirmation agreements on the other hand are highly scrutinized by the Court as the Bankruptcy Code requires the Court to determine if the agreement is in the debtor's best interest or that it does not impose an undue hardship on the debtor.
Despite finding it was the intent of the Creditor and Debtor to assume the lease, Judge Hursh denied the reaffirmation agreement in In re Kearns because the plan language of 524(c) did not authorize the Court to approve the lease assumption through a reaffirmation agreement. Instead, the provisions under § 365(p) are the sole procedure for assuming leases.
The Bankruptcy Code can be hard to navigate. If you need assistance understanding how to safely proceed in Bankruptcy Court or out-of-court workouts, contact the experienced litigation attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.
[1] In re Kearns, Case No. 20-20252-BPH, 2-3 (Bankr. D. Mont. Feb. 12, 2021).
[2] In re Kearns, Case No. 20-20252-BPH, 2-3 (Bankr. D. Mont. Feb. 12, 2021).