Bankruptcy: Implementation of Reform Act's Debt Reaffirmation Agreement Provisions
Released: 2007-12-07T00:00:00

Letter

Background

Overview of Reaffirmation Agreement Process

The reaffirmation agreement process involves several parties and many steps. Creditors, debtors, debtor attorneys, and the courts each have reaffirmation agreement roles. The process begins when a debtor in bankruptcy decides to reaffirm a debt or the creditor proposes a reaffirmation agreement and forwards it to a debtor. Officials at four credit institutions that frequently engaged in reaffirmation agreements we reviewed stated that once they receive notice of a debtor filing for bankruptcy, the creditors generally send the debtor or the debtor’s attorney their proposal for a reaffirmation agreement. Under the Reform Act, certain certifications may be required such as an attorney certification that certifies that the agreement does not impose an undue hardship on the debtor. Also, under the Reform Act, the court is to review agreements where debtors are not represented by an attorney and those that have a presumed undue hardship. A presumption of undue hardship is triggered when a debtor’s monthly net income (including expected monthly payments on post-bankruptcy debt) is not sufficient to pay the proposed monthly reaffirmed payment. A debtor may try to counter this presumption in writing. After these reviews, the court may approve or disapprove the agreement. Figure 1 provides more detailed information about the reaffirmation agreement process.

Reform Act Provisions Related to Reaffirmation Agreements

Described as representing the most comprehensive set of reforms in more than 25 years, the Reform Act addressed, among other things, the reaffirmation agreement process. The Reform Act added new disclosures and court review requirements with respect to reaffirmation agreements designed to help ensure that reaffirmation agreements are consistent with the debtor’s best interests. The reaffirmation agreement requirements include, among other things, disclosures notifying debtors of reaffirmed terms. Agreements must also include the debtor’s monthly income and expenses to determine if a presumption of undue hardship exists and certification by the debtor’s attorney that the agreement represents a fully informed and voluntary agreement by the debtor and that the agreement does not impose an undue hardship. Table 1 summarizes key reaffirmation agreement disclosure requirements under the Reform Act. Appendix II provides the full text of the disclosure statements required by the Reform Act.

The Reform Act allows for some flexibility in the disclosures required in reaffirmation agreements and provides that the disclosure requirements shall be satisfied if the disclosures were provided to the debtor in good faith. Almost all of the disclosures can be made in a different order and with different terminology than what is set forth in the law. In addition, one creditor official we interviewed stated that his organization uses a standardized form created by the creditor to comply with the Reform Act. However, according to the official, his company has 32 versions of the form designed to comply with individual bankruptcy court requirements.

The AOUSC, which provides administrative, legal, and other support to the federal judiciary, issued a reaffirmation agreement form that incorporates the required and recommended language in the Reform Act. The form was issued on October 2005 and was revised in August 2006 and in January 2007. Because of the requirement for flexibility in disclosure language, creditors and debtors are not required to use the AOUSC form and may use other forms. According to AOUSC, one of the primary reasons the federal judiciary did not impose a specific reaffirmation form was because the law allows for different reaffirmation agreement forms. The federal judiciary also took other factors into consideration, according to AOUSC, including the many variations of statutory requirements that are dependent upon the debtors’ circumstances, and the fact that a creditor and debtor might want to include language in addition to what the law requires.

Court Review of Reaffirmations under the Reform Act

The Reform Act also specifies in what circumstances reaffirmation agreements are to be reviewed by the courts during the bankruptcy process. In general, if the reaffirmation agreement is signed by a debtor attorney, the agreement is effective upon filing with the court, unless income and expense information on the debtor’s statement in support of the agreement reflects insufficient funds for making the reaffirmation payment, which triggers the presumption of an undue hardship. If a presumption of undue hardship exists, the court is required to review and approve or disapprove the agreement based on whether the presumption is countered by debtor explanations for how the debtor can afford the reaffirmation payment.

The Reform Act makes certain provisions for reaffirmation agreements that do not include a debtor attorney signature. Reaffirmation agreements might not include a debtor attorney signature because the debtor has opted to undergo the bankruptcy process without an attorney, which is known as a pro se bankruptcy filing. Also, in some instances, debtor attorneys might not sign the agreement because he or she believes the agreement imposes an undue hardship on the debtor. All agreements that are not signed by debtor attorneys must be submitted to the court for review and approval or disapproval, with the exception of reaffirmed consumer debt secured by a lien on real property such as a home. Agreements cannot be disapproved without a hearing and notice of the hearing to the debtor and creditor.

Reaffirmations with Credit Unions

Under the Reform Act, reaffirmation agreements where the creditor is a credit union have different requirements than reaffirmation agreements with other types of creditors. While most requirements for reaffirmation agreements are uniform across all types of lenders, the Reform Act’s presumption of undue hardship provisions are not applicable to agreements with credit unions. This exemption is evident in several Reform Act provisions. For example, while reaffirmation agreements where the creditor is a credit union are to include a debtor statement in support of the reaffirmation agreement when the agreement is signed by a debtor attorney, the statement is not, however, required to include the income and expense information otherwise used to calculate whether there is a presumption of undue hardship. Instead, such a debtor’s statement in support of the agreement is required to include that the reaffirmation is in the debtor’s financial interest, that the debtor can afford the reaffirmation payments, and that the debtor received a copy of the required disclosures and has completed and signed the agreement. In addition, when the debtor is represented by an attorney, with respect to credit unions, a required debtor notification is to explain the reaffirmation process and state that the reaffirmation agreement is effective upon filing with the court. By contrast, the required debtor notification for agreements with all other types of creditors states that the agreement is effective upon filing with the court unless the agreement is presumed to be an undue hardship.

Required Reform Act Disclosure Statements Were Included in Most Reaffirmation Agreements, though Required Information Was Missing in Some Agreements

We estimate that required disclosure statements were included in most reaffirmation agreements for each of the five districts. For example, we estimate inclusion of the statement “Amount Reaffirmed” and the amount was from 87 percent (in WV-S) to 98 percent (in CA-C) of all reaffirmation agreements. Similarly, we estimate that the statement “Annual Percentage Rate” and the amount were in 86 percent (in AL-N and WV-S) to 97 percent (in CA-C) of all reaffirmation agreements for the five districts. Debtor attorney certifications were frequently included in reaffirmation agreements signed by attorneys—from an estimated 95 percent (in WV-S) to 100 percent (in CA-C) of agreements. We also estimate that 67 percent (in AL-N and WV-S) to 88 percent (in IL-N) of non-credit union agreements included monthly income, expense, and net income information— conversely, an estimated 12 percent (in IL-N) to 33 percent (in AL-N and WV-S) were missing this required information (as mentioned previously, these data are not required of credit union agreements signed by a debtor attorney). This information helps to inform debtors, debtor attorneys, creditors, and court officials of the potential inability of the debtor to make payment on reaffirmed debt. While information about income, expenses and net income available can be determined from other schedules in the bankruptcy filings or during hearings, having that information included in the agreement makes it easier for the courts to evaluate the debtor’s financial situation. In March 2007, the Judicial Conference’s Advisory Committee on Bankruptcy Rules proposed the use of a reaffirmation agreement coversheet that, if approved, would make it mandatory for debtors to provide income and expense information, among other things, on the coversheet to be used in the evaluation of undue hardship. If approved by the Judicial Conference, the mandatory coversheet would appear to address the issue of missing financial information.

Financial Data, Asset Information, and Debtor Notifications Included in Most Reaffirmation Agreements

The Reform Act requires that reaffirmation agreements include financial data disclosure statements for the amount reaffirmed and the annual percentage rate for the amount reaffirmed. As shown in table 2, we estimate that these disclosure statements were included in a high percentage of all agreements within the five districts. For example, the statement “Amount Reaffirmed” and the amount were included in an estimated 87 percent (in WV-S) to 98 percent (in CA-C) of all reaffirmation agreements. Similarly, the statement “Annual Percentage Rate” and the amount were included in an estimated 86 percent (in AL-N and WV-S) to 97 percent (in CA-C) of all reaffirmation agreements for the five districts.

The Reform Act requires several notification disclosure statements designed to help ensure that debtors make decisions about reaffirming debt that are in their best interests, such as informing them of the reaffirmation agreement process as well as the effect of agreeing to reaffirm debt. We estimate these notification disclosure statements were included in high percentages of reaffirmation agreements in all five districts. One notification disclosure explains the reaffirmation process and certain requirements. For example, the disclosure instructs debtors on which sections of the agreement to read and sign and under what circumstances the agreement may be reviewed by the court before becoming effective. The notification also informs debtors, among other things, of their right to rescind the agreement and that reaffirmation agreements are not required. As shown in table 2, we estimate that non- credit union reaffirmations included the notification disclosure statement explaining the reaffirmation process and certain requirements in an estimated 87 percent (in AL-N) to 96 percent (in CA-C) of reaffirmation agreements for the five districts. This disclosure statement differs for credit unions. We provide estimates for inclusion of disclosure statements in credit union agreements later in this report.

Other required debtor notification disclosure statements were also included in high percentages of reaffirmation agreements in the five districts. As shown in table 2, we estimate that 87 percent (in WV-S) to 97 percent (in CA-C) of all reaffirmation agreements within the five districts included a statement instructing debtors to review the required disclosures. Similarly, we estimate that 87 percent (in WV-S) to 97 percent (in CA-C) of all reaffirmation agreements in the five districts included a statement that summary information in the reaffirmation agreement was made pursuant to the requirements of the Bankruptcy Code.

With respect to unsecured debts, other than requiring a brief description of the credit agreement, the Reform Act does not provide a specific disclosure statement for inclusion of asset information, the original purchase price, or the original amount of the loan. However, when a reaffirmed debt is secured by an asset, the Reform Act requires both the asset and either the original purchase price or original amount of the loan be listed in the agreement. As shown in table 2, we estimate that required information describing the asset securing the agreement was included in 87 percent (in WV-S) to 99 percent (in CA-C) of agreements in the five districts. The original purchase price or the original amount of the loan was also included in a high percentage of agreements—an estimated 81 percent (in WV-S) to 91 percent (in CA-C) for the five districts.

Debtor Agreement Disclosure Statement Included in Most Reaffirmation Agreements

The Reform Act requires a disclosure statement that includes a statement that the debtor agrees to reaffirm the debt, a field for a brief description of the credit agreement, a field for a description of any changes to the credit agreement made as part of the reaffirmation agreement, and fields for debtor and creditor signatures. As shown in table 3, we estimate that this statement by the debtor was included in 84 percent (in WV-S) to 95 percent (in CA-C) of all reaffirmation agreements within each of the five districts. We also estimate that creditors or debtors included required information describing the credit agreement in 76 percent (in WV-S) to 84 percent (in IL-N) of all reaffirmation agreements in the five districts, as shown in table 3. These descriptions varied in content. For example, when reviewing reaffirmation agreements, we observed agreements that included descriptive information about the type of contract involved in the transaction, such as a type of “retail installment contract” or “promissory note.” Other agreements included more detail about the terms of the credit agreement, such as the number of payments, monthly payment amounts, and original amount of the loan.

While not required information in all reaffirmation agreements, in a few reaffirmation agreements in the five districts, creditors or debtors included a description of changes to the credit agreement made as a part of the reaffirmation. We estimate that 12 percent (in AL-N) to 20 percent (in CA- C and WV-S) of all reaffirmations within the five districts included a description of such a change. For example, in one district we reviewed 36 agreements that had changes identified in the agreement. The interest rate was cited as a change in 17 of these 36 agreements. Other changes described in the remaining 19 agreements included reductions in the loan balance, changes to the payment date, and changes in the monthly payment amount. Because analysis of these 36 agreements was conducted in addition to our standardized file review, we are not able to generalize these figures to all reaffirmations in this district.

Debtor Attorney Certification Included in Most Reaffirmation Agreements, although Notice of Undue Hardship Unclear in Some Agreements

Debtor attorneys signed reaffirmation agreements in an estimated 90 percent to 97 percent of all agreements in each of the five districts. When a debtor attorney signs a reaffirmation agreement, the Reform Act requires that a disclosure statement be included with the signature. The disclosure statement includes the debtor attorney’s certification that (1) the agreement represents a fully informed and voluntary agreement by the debtor, (2) the agreement does not impose an undue hardship on the debtor or any dependent of the debtor, and (3) that the attorney has fully advised the debtor of the legal effect and consequences of the agreement and any default under the agreement. As shown in table 4, we estimate that this required attorney disclosure statement was included in 95 percent (in WV-S) to 100 percent (in CA-C) of reaffirmations signed by attorneys in the five districts.

In addition to the disclosure statement, the Reform Act requires that when a presumption of undue hardship has been established with respect to the agreement, the debtor attorney certify that in his or her opinion, the debtor is able to make the reaffirmation payment. We estimate that 1 percent (in CA-C) to 11 percent (in WV-S) of all reaffirmation agreements with non-credit unions in the five districts included an attorney certification statement explicitly identifying that a presumed undue hardship was established with respect to the agreement, and that in the opinion of the attorney, the debtor could make the reaffirmation payment. Reaffirmation agreements are not required by the Reform Act to include an explicit indication of whether a presumed undue hardship has been established with respect to the agreement. While we did not formally track the extent to which reaffirmation agreements forms included an explicit way for presumed undue hardship to be identified, we observed that some reaffirmation agreement forms included a way to explicitly identify presumed undue hardship in the debtor attorney certification and some did not. For example, we observed reaffirmation agreement forms that included the following language for debtor attorneys to certify, which has no explicit indication of whether a presumption of undue hardship had been established: “If a presumption of undue hardship has been established with respect to this agreement, in my opinion the debtor is able to make the payment.” This statement is unclear because it does not explicitly identify whether a presumption of undue hardship has been established with respect to the reaffirmation agreement. Instead, the statement only indicates that “if” a presumption of undue hardship is established, the debtor attorney certifies that the debtor can make the payment. AOUSC’s reaffirmation agreement form dated January 2007 addresses this ambiguity by placing a checkable box next to an explicit statement indicating that there is a presumption of undue hardship and that the debtor attorney certifies that the debtor is able to make the required payment. As mentioned previously, use of the AOUSC form is suggested but not required. Figures 2 and 3 illustrate clear and unclear debtor attorney certification of an undue hardship.

In some reaffirmation agreements, the debtor attorney certification portion of reaffirmation agreements included additional language beyond the disclosure statement required by the Reform Act. We estimate that from 1 percent (in CA-C) to 11 percent (in TX-N) of reaffirmation agreements in the five districts included such additional language. We observed several instances where the additional language supplemented the debtor attorney’s certification by indicating that the attorney was not guaranteeing the debtor’s reaffirmation payment. One example of this supplemental information is shown in figure 4.

Debtor Statement in Support of Agreement Included in Most Reaffirmation Agreements, although Required Data Missing in Some Agreements

The Reform Act requires a debtor statement in support of the reaffirmation agreement that is to include debtor-inserted data for determination of whether a presumption of undue hardship is established. The data to be inserted include monthly income, monthly expenses (which are to include payments on post-bankruptcy debt and other reaffirmation payments), and the monthly net income remaining to make the monthly payments for the reaffirmed debt. If the net income is not sufficient to pay the reaffirmation payments, a presumption of undue hardship is established that the debtor may overcome if the debtor explains, to the satisfaction of the court, how the debtor can afford to make the payments. Specifically, the court is required to review reaffirmation agreements where a presumption of undue hardship has been established when net income is insufficient for the reaffirmation payments. The court may approve or disapprove the agreement based on information presented to the court.

The majority of reaffirmation agreements were with non-credit unions— from 80 percent to 94 percent of reaffirmations in the five districts. As shown in table 5, we estimate that 89 percent (in AL-N) to 97 percent (in CA-C) of reaffirmation agreements with non-credit unions for the five districts included the debtor statement that the reaffirmation agreement does not impose an undue hardship on the debtor. We also estimate that 67 percent (in AL-N and WV-S) to 88 percent (in IL-N) of non-credit union agreements included monthly income, expense, and net income information—conversely, an estimated 12 percent (in IL-N) to 33 percent (in AL-N and WV-S) were missing this required information. This information is a key component in the presumption of undue hardship determination. While information about income, expenses, and net income available can be determined from other schedules in the bankruptcy filings or during hearings, having that information included in the agreement makes it easier for courts to evaluate the debtor’s financial situation. For example, one case included reaffirmation agreements certified by a debtor attorney for two automobiles with monthly payments of $315 and $376. The debtor’s statement in support for each reaffirmation agreement was signed by the debtor but did not include the required monthly income, expense, and net income data. According to monthly expenses and net income reported on other documents the debtor provided the court, which included only one of the reaffirmed car payment amounts as an expense, the debtor’s monthly net income was negative $131, reflecting the potential inability of the debtor to afford the reaffirmed payment amounts.

Federal Judiciary Has Proposed a New Form to Evaluate Undue Hardship

In March 2007, the Judicial Conference’s Advisory Committee on Bankruptcy Rules proposed the use of a reaffirmation agreement coversheet form that, if approved, would make it mandatory for debtors to provide financial information on the coversheet, such as amount of debt reaffirmed, the annual percentage rate for reaffirmed debt, monthly reaffirmation payment, and monthly income and expense information at the time of petition and reaffirmation agreement filings, to facilitate the evaluation of undue hardship. The coversheet form also requires a supplemental debtor certification that any explanation of the difference between the income and expenses reported on the debtor’s bankruptcy petition documents and the income and expenses reported in the debtor’s statement of support of the reaffirmation agreement is true and correct. According to AOUSC, this new coversheet form could take effect by December 1, 2009, after undergoing a period of at least 6 months for public comment on the new coversheet as well as final review by the Judicial Conference. If approved, the coversheet would appear to address the issue of missing financial information. See appendix V for the proposed reaffirmation agreement coversheet.

Small Percentage of Reaffirmation Agreements Required a Motion for Court Approval

The Reform Act requires that a motion for court approval be included in reaffirmation agreements when the debtor is not represented by an attorney. We determined whether debtors were not represented by an attorney by noting whether reaffirmation agreements were or were not signed by a debtor attorney. Reaffirmation agreements were not signed by debtor attorneys in an estimated 3 percent to 10 percent of agreements for the five districts. In two districts we had sufficient data to estimate the extent to which a motion for court approval was included when a debtor attorney did not sign the agreement. In the two districts (IL-N and WV-S), a motion for court approval was included in 62 percent (in WV-S) and 80 percent (in IL-N) of agreements. In one of the two districts (WV-S) court officials told us that regardless of whether or not a motion for court approval is filed, their internal process calls for clerk staff to review each reaffirmation agreement and forward those with undue hardship or lack of a debtor attorney's signature for court review. In the remaining three districts, the number of agreements including a debtor attorney signature was not sufficient to generate reliable estimates. Our review of cases in these three districts showed that 13 of 26 agreements (in AL-N), 28 of 34 agreements in (TX-N), and 20 of 23 agreements (in CA-C) without debtor attorney signatures included the motion.

Reaffirmation Agreements with Credit Unions Included Required Disclosures in Varying Percentages

Reaffirmation agreements with credit unions comprised an estimated 6 percent to 20 percent of all reaffirmations in each of the five districts. As mentioned previously, under the Reform Act credit union reaffirmation agreements have different requirements than reaffirmation agreements with other types of creditors. The debtor notification statement explaining the reaffirmation agreement process is generally the same as the statement for other types of creditors. However, the debtor notification statement for credit union reaffirmation agreements indicates that the agreement is effective upon filing with the court (for non-credit unions, the debtor notification statement indicates that the agreement is effective upon filing with the court unless the reaffirmation is presumed to be an undue hardship). For the five districts, reaffirmation agreements with credit unions included the complete credit union debtor notification statement that explained the reaffirmation agreement process and stated that reaffirmation agreements with credit unions are effective upon filing with the court in an estimated 61 percent to 96 percent of agreements. Another difference for agreements with credit unions is that the Reform Act does not require an agreement with credit unions to include debtors’ monthly income, expense, and net income information in the debtor statement in support of the agreement (unless the agreement does not include a debtor attorney signature). Instead, the disclosure statement indicates that the debtor believes the agreement is in his or her financial interest and that he or she can afford to make the reaffirmation payments. In four districts we estimate that from 54 percent to 93 percent of agreements with credit unions included the credit union debtor statement in support of the agreement. However, for these same four districts, we also estimate that 45 percent to 96 percent of agreements with credit unions included the debtor statement whereby the debtor’s income, expense and net income information could be recorded even though such data were not required (because the agreement was with a credit union and the debtor was represented by an attorney). Appendix II includes estimates for inclusion of other required disclosure statements in agreements with credit unions for the five districts.

Secured Debts for Autos and Homes Most Frequent Type of Reaffirmed Debt; for Most Agreements, Reaffirmed Debt Burden Less than 25 Percent of Total Debt

Secured Debts Most Frequently Reaffirmed

An estimated 90 percent (in AL-N) to 98 percent (in TX-N and WV-S) of reaffirmations in the five districts were for secured debts. Specifically, debtors more frequently reaffirmed debts for automobiles and homes in comparison to debts for other assets. We estimate that 54 percent (in AL- N) to 87 percent (in CA-C) of reaffirmations in the five districts were for automobiles. In addition to automobiles, in four districts, we estimate that between 15 percent (in WV-S) to 24 percent (in IL-N) of reaffirmation agreements were for homes. Reaffirmations for homes in the remaining district (CA-C) occurred in an estimated 2 percent of agreements. In addition to automobiles and homes, secured debts reaffirmed included, among other things, those for boats, electronics, and household goods. Appendix IV, table 14, provides more information on debts reaffirmed for each district.

Unsecured debt was reaffirmed infrequently—occurring in an estimated 2 percent to 10 percent of all reaffirmation agreements in the five districts. In the one district where an estimated 10 percent of all reaffirmations were for unsecured debt, almost half of these agreements were for electricity service (agreements that reaffirmed delinquent payments on electricity service so that the service could continue). Because of the small number of reaffirmation agreements that were unsecured, the following information about these agreements is based on our review of actual reaffirmation agreements and is not projected to the entire population of reaffirmation agreements in the five districts. Twenty of the 52 unsecured agreements reviewed were for some type of credit card debt such as bank charge cards, lines of credit, and merchant credit cards. In the remaining 32 cases, debtors reaffirmed either an unsecured personal loan from a bank, a debt to another individual, a tax debt, or electricity service.

Similar to agreements for non-credit unions, most credit union reaffirmation agreements were for automobiles and houses. The types of secured and unsecured debts reaffirmed with credit unions generally did not differ from the types of secured and unsecured debts reaffirmed with non-credit unions. However, we are not able to make statistically significant comparisons between the types of debt reaffirmed by credit and non-credit unions because of the small number of credit union reaffirmation agreements.

For Most Agreements, Reaffirmed Debt Burden Less than 25 Percent of Total Debt

One concern that consumer advocates and academics have had is that if the debtor reaffirms a high proportion of the total debts owed when filing for bankruptcy, the debtor may not obtain the financial “fresh start” that is one of the fundamental purposes of bankruptcy. To determine whether debtors were reaffirming a large proportion of their total debts, we examined reaffirmed debts in each case we reviewed as a percentage of the total debts the debtor reported he or she owed when he or she filed for bankruptcy.

As shown in table 6, we estimate that in 58 percent (in AL-N) to 68 percent (in CA-C) of cases in the five districts, total reaffirmed debts were less than 25 percent of total debts. By contrast, in 0 percent (in TX-N) to 8 percent (in IL-N) of cases, reaffirmed debts comprised 75 percent or more of total debts. We reviewed 63 reaffirmation agreements in 26 cases in which reaffirmed debt was 75 percent or more of total debts. For these 26 cases, automobiles were reaffirmed in 20 cases, homes in 18, mobile homes in 2, and household goods or other assets in 5 of the cases. In addition, we estimate that the average total amount of debt reaffirmed per case for the five districts was from $15,000 to $47,000, while the average of total debts per case was from $120,000 to $189,000.

The debt burden for debtors after bankruptcy may include debts in addition to those reaffirmed. For example, debtors’ total debts may include student loans, child support obligations, or other financial obligations that cannot be discharged in bankruptcy. Our scope of work included gathering information about debts reaffirmed and total debts at the time of filing, but did not gather data on total debt burdens following discharge of all nonreaffirmed debt.

For the five districts, the average amount reaffirmed per reaffirmation agreement was an estimated $12,000 to $31,000 for non-credit union reaffirmation agreements. For each of the three districts for which we are able to estimate the average amount reaffirmed for credit unions, the average amount reaffirmed in credit union agreements was an estimated $13,000.

Reaffirmed Interest Rates Were Less than or Equal to the Original Rate

We estimate that the vast majority of interest rates on reaffirmed debt were equal to or less than the interest rate on the original debt, as shown in figure 5. As mentioned previously, the Reform Act requires that the rate on reaffirmed debt be disclosed as the “Annual Percentage Rate,” hereafter referred to as the interest rate. While the Reform Act requires a brief description of the underlying credit agreement, the interest rate for the original debt is not specifically required to be included in reaffirmation agreements. However, we found the original interest rate in reaffirmation agreements or attached original credit agreements in some case files. The original interest rate was available in five districts in an estimated 32 percent to 88 percent of reaffirmation agreements or their supporting documents. One district had a high percentage of agreements with the original interest rate because the district had a standard form that required disclosure of the original interest rate.

As reflected in figure 5, we estimate that from 91 percent (in IL-N) to 100 percent (in WV-S) of agreements in each of the five districts had reaffirmed interest rates less than or equal to the original rate. In one of the five district bankruptcy courts (WV-S), the reaffirmed interest rate was less than the original interest rate in an estimated 44 percent of reaffirmation agreements. In the other four districts, interest rates were less than original interest rates in an estimated 10 percent (in IL-N) to 17 percent (in AL-N) of reaffirmation agreements.

Average interest rates on reaffirmed debt were similar for the five districts. The same was true for original interest rates. For the five districts the average interest rate on the debt reaffirmed was an estimated 8 percent (in CA-C, IL-N, and TX-N) to 10 percent (in AL-N and WV-S), while the average interest rate on the original debt was an estimated 9 percent (in TX-N) to 14 percent (in AL-N).

Moreover, we noted the following characteristics: For 9 (of 1,164) reaffirmation agreements we reviewed where the reaffirmed interest rate was greater than the original rate, the amount of the interest rate increase ranged from 0.10 percentage points to 4.25 percentage points. Four of the agreements were for houses, 3 for automobiles, 1 for a mobile home, and 1 for household goods. A variety of creditors were involved in the 9 agreements—ranging, for example, from two credit unions to a mortgage company and a department store.

For 72 (of 1,164) reaffirmation agreements we reviewed where the reaffirmed interest rate was less than the original rate, the amount of the interest rate decrease ranged from 0.01 percentage points to 26.99 percentage points—which was for a reduction in rate to 0 percent. Over half of the 72 reaffirmation agreements were for automobiles and homes—44 were for automobiles and 7 were for homes. The remaining 21 agreements included 6 agreements for household goods, 5 for mobile homes, 8 agreements for a wide variety of debt—including jewelry and electronic equipment—and 2 agreements that did not disclose the type of debt.

For the 61 (of 1,164) reaffirmation agreements we reviewed with credit unions (that disclosed both an original and a reaffirmed interest rate), in each of the five bankruptcy courts the interest rate on the reaffirmed debt was equal to or less than the interest rate on the original debt in all but 2 reaffirmation agreements—10 of 10 agreements in AL-N, 27 of 28 agreements in CA-C, 2 of 2 agreements in IL-N, 16 of 17 agreements in TX-N, and 4 of 4 agreements in WV-S.

We interviewed four creditors who were among the firms that most frequently engaged in reaffirmations that we reviewed in the five selected districts. Officials from three of these creditors stated that during the reaffirmation process their policy was to not adjust credit terms, such as interest rates, from the terms established in original debt contracts. The fourth creditor said that when reaffirming debt it had a policy to consider reducing amounts reaffirmed and interest rates based on certain criteria.

As mentioned previously, reaffirmed unsecured debt occurred in a small number of reaffirmation agreements reviewed (52 of 1,164). Consequently, information about these agreements is based on our review of actual reaffirmation agreements and is not projected across the entire population of reaffirmed agreements in the five districts. Interest rates and amounts reaffirmed for unsecured debt in reaffirmations varied in the agreements we reviewed in the five districts. Interest rates ranged from 0 to 21 percent among 41 of 52 unsecured reaffirmations that disclosed a reaffirmed interest rate. Nineteen of the 41 agreements were reaffirmed with a 0 percent interest rate, while the remaining 22 agreements had interest rates ranging from 7.99 to 21 percent. Examples of unsecured debt reaffirmed at 0 percent interest included electricity service and credit card debt. Examples of unsecured debt reaffirmed in the 7.99 to 21 percent range included overdraft protection for a checking account reaffirmed at a 12 percent interest rate and a credit card reaffirmed at a 21 percent interest rate. Amounts reaffirmed for the 52 unsecured agreements also varied (all of the agreements had amounts reaffirmed disclosed), ranging from $0 (for a line of credit on a credit card) to $25,000 (for a legal fine owed by a debtor). While we cannot generalize average amounts for unsecured reaffirmations, for the 52 agreements we reviewed, the average amount of unsecured debt reaffirmed was $2,300.

During our review, court officials in one district and academics who conduct bankruptcy research that we spoke with expressed concerns that debtors who are not represented by an attorney would potentially be at a disadvantage. To test this premise, we analyzed interest rate data based on whether a debtor attorney had signed an agreement (our proxy for whether a debtor was represented by an attorney) and when an original interest rate could be determined (disclosure of the original interest rate is not required). When a reaffirmation agreement did not include a debtor attorney’s signature, the interest rate on the reaffirmed debt was equal to or less than the interest rate on the original debt in all reaffirmations reviewed in each of the five bankruptcy courts. In addition, with the exception of one district, we estimate that there was no significant difference between the average interest rate on reaffirmed debt when a reaffirmation agreement either included or did not include a debtor attorney’s signature. In one district where the difference was statistically significant, however, the average reaffirmed interest rate was an estimated 8 percent when the agreement was signed by a debtor attorney, and an estimated 12 percent when the agreement was not signed by a debtor attorney.

Agency Comments

We requested comments on a draft of this report from the Director of AOUSC. AOUSC reviewed a draft of this report and had technical comments, which we incorporated as appropriate.

We are sending copies of this report to the Director of AOUSC and interested congressional committees and parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-8757 or jenkinswo@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff contributing to this report are listed in appendix VI.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to determine the following: To what extent have required Reform Act disclosure statements and other required information (such as the annual percentage rate for the reaffirmed debt) been incorporated into reaffirmation agreements?

What types of debts were reaffirmed and to what extent did reaffirmed debt amounts comprise debtors’ overall debt burden when they filed for bankruptcy?

How did the reaffirmed and original interest rates compare?

To answer these objectives, in five selected bankruptcy court districts we reviewed a representative sample of bankruptcy cases that included at least one reaffirmation agreement. We selected this sample of bankruptcy cases from a universe of bankruptcy case data provided by bankruptcy court officials. We determined that these data were sufficiently reliable to develop the universe of cases for each of the five district bankruptcy courts. To determine the reliability of the bankruptcy data, we reviewed documentation about the system that produced them and interviewed agency officials knowledgeable about the data. Our case file review was performed using a data collection instrument that included uniform questions to ensure data were collected consistently. We relied on data presented in bankruptcy documents filed with the courts by debtors, creditors, and debtor attorneys. Bankruptcy courts and U.S. Trustees manage bankruptcy cases and perform some measures to verify data that help ensure the reliability of information provided. For example, bankruptcy court officials have measures to ensure that data entered into information systems is accurate. Also, as a part of the bankruptcy process, the U.S. Trustee Program verifies selected debtor-reported financial data, such as income and assets.

We also interviewed bankruptcy experts, creditor officials as well as bankruptcy court, U.S. Trustee, and bankruptcy administrator officials. We used information gathered during these interviews to identify data contained in bankruptcy file documents, including reaffirmation agreements, that could assist in answering our objectives. We considered reviewing reaffirmation agreements from a nationally representative sample of bankruptcy cases that included at least one reaffirmation agreement. However, because of the nature of the bankruptcy courts’ data, information needed to develop a sample frame of cases with reaffirmation agreements is only available at the district level. In addition, we interviewed four creditors that we identified during our document review as the creditors that most frequently signed reaffirmation agreements in the five selected districts.

When reviewing reaffirmation agreements, we determined both whether complete disclosure information was included in the reaffirmation agreement and whether the language in the disclosure, while complete, varied at all from what is required by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (referred to here as the Reform Act). Reaffirmation agreements had some variation in disclosure language, as is allowed by the Reform Act, but the variations were generally minor alterations to the disclosure that did not affect the disclosure content. For example, headings were often inserted in the Part A disclosure sections that were not prescribed in the Reform Act but that did not affect the disclosure content. In another example of variation, many agreements also included both credit union and non-credit union disclosure information. For purposes of our analysis, we combined the data categories indicating inclusion of a verbatim disclosure and a nonverbatim (but complete) disclosure.

To obtain additional information about reaffirmation agreements and the bankruptcy process, we reviewed literature from bankruptcy journals and attended the American Bankruptcy Institute One-Year Anniversary Program on the Bankruptcy Abuse Prevention and Consumer Protection Act, October 16, 2006, in Washington, D.C.

Our work was conducted from June 2006 through November 2007 in accordance with generally accepted government auditing standards.

Selection of Five Bankruptcy Court Districts for File Review

In selecting bankruptcy court districts in which to conduct reviews of cases with reaffirmation agreements, we selected courts based on the following criteria: a range of filing volume, proportion of Chapter 7 filings within the bankruptcy courts, whether cases were overseen by the U.S. Trustee Program or the Bankruptcy Administrator program, and the courts’ geographic location. During the January 1, 2001, to June 30, 2006, time period, the average quarterly filing volume for the nation’s 90 district bankruptcy courts was 385,424. The five districts we selected collectively represented about 12 percent of those quarterly filings. When determining which districts to include in our study, we selected the 2001 to 2006 time period to gather sufficient historical filing data to determine the average number of filings each district had over time.

Selection of Cases Reviewed within Five Bankruptcy Court Districts

At each of the selected bankruptcy court districts, we obtained a universe of all cases with at least one reaffirmation agreement filed between October 17, 2005, and October 17, 2006. We chose this time period because the Reform Act’s effective date for reaffirmation agreement requirements was October 17, 2005. We selected stratified random probability samples of cases from each bankruptcy court. We stratified the sampling universe for each district by case status (open versus closed) and by pro se status (i.e., debtors who file for bankruptcy without attorney representation). For each selected case, we examined every reaffirmation agreement on record. We calculated estimates of percentages and means/medians at the reaffirmation agreement level using methods appropriate for stratified cluster samples. Table 8 provides a description of the sampling universe and samples for the five selected districts.

With these probability samples, each case had a nonzero probability of being selected, and that probability could be computed for any case. Each selected case was subsequently weighted in the analysis to account statistically for all the members of the population, including those who were not selected.

Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval (e.g., plus or minus <YY> percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. As a result, we are 95 percent confident that each of the confidence intervals in this report will include the true values in the study population.

Estimates from these samples are not generalizable to the population of all bankruptcy courts; however, they can be generalized to each of the selected bankruptcy court districts and are intended for illustrative purposes. All percentage estimates in this report have a margin of error of plus or minus 10 percent or less, unless otherwise noted. All mean and median estimates have a relative error of 20 percent or less, unless otherwise noted. Some percentage estimates we present have a margin of error greater than plus or minus 10 percent. This occurred for percentage estimates based on a small number of cases in the district samples with specific characteristics that were unavailable to us prior to sampling. For instance, when we present percentage estimates for reaffirmation agreements made with credit unions, which we estimate comprises only 6 to 20 percent of all reaffirmation agreements across the districts, the small number of agreements made with credit unions in the samples results in larger margins of error. Some mean and median estimates we present in this report have a great deal of variance, resulting in large percentages of relative error. For instance, when we discuss the mean and median amount of the debt reaffirmed per reaffirmation agreement, individual reaffirmation agreement debts range from very low amounts (such as a small outstanding balance for an automobile) to much higher amounts (as with the outstanding balance for the mortgage on a home), these large variations result in larger percentages of relative error.

Appendix II: Reaffirmation Agreement Disclosures and Required Information; Estimates for Credit Unions

This appendix includes two tables. Table 9 presents Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Reform Act) reaffirmation agreement disclosure statements and other required information. We included disclosure inclusion information for all reaffirmation agreements in the letter portion of this report. Because some Reform Act provisions apply only to credit unions, we present data solely for credit unions in table 10. Table 10 shows estimated percentages for inclusion of disclosure statements and other required information for reaffirmation agreements with credit unions, for five bankruptcy court districts—Northern Alabama (AL-N), Central California (CA-C), Northern Illinois (IL-N), Northern Texas (TX-N), and Southern West Virginia (WV-S). As the tables indicate, the Reform Act places most information on reaffirmation agreements within five separately labeled sections—A through E—each with its own set of disclosure statements. Italicized areas in table 9 denote disclosure statements that GAO assessed were or were not included in reviewed reaffirmation agreements.

Table 10 lists disclosure information for reaffirmation agreements with credit unions. The percentage estimates can be generalized to all reaffirmation agreements with credit unions in cases filed in the five districts between October 17, 2005, and October 17, 2006. Unless otherwise noted, our percentage estimates in table 10 fall within a margin of error of plus or minus 20 percent or less.

Appendix III: Federal Judiciary Reaffirmation Agreement Form, January 2007

Appendix IV: Additional Estimates on Cases and Reaffirmation Agreements Filed in Five Bankruptcy Court Districts

As part of our review, we collected information not reported in the body of this letter that provides context about the extent to which reaffirmations are included in Chapter 7 cases, the financial circumstances of debtors, and content of reaffirmation agreements. For example, we collected information at the case-level about the debtor’s assets, liabilities, income, and expenses reported on the petition filed with the court and whether the court waived the requirement for the filer to pay filing fees. We also collected additional data about the reaffirmation agreements that included whether or not (1) the agreement was with a credit union, (2) a debtor attorneys signed the agreement, (3) the court approved or disapproved the agreement, (4) the agreement was rescinded, and (5) the agreement was filed after a case was closed. The following figures and tables provide estimates for the additional information. Unless otherwise noted, our percentage estimates in this appendix fall within a margin of error of plus or minus 10 percent or less, and our mean and median estimates fall within a relative error of 20 percent or less. In addition, for some items we are able to provide estimates for means but not medians, or vice versa. This is because the estimates of means and medians can be different in terms of their distributions and so can the variances of the estimates. Two of the factors that control the sampling error of an estimate are sample size and the estimated variation of the parameter we are estimating (mean and median). The difference between the sampling error of the means and medians is most likely due to the estimated variance of the parameters. Also, our samples were not designed to generate precise estimates of means or medians, so the results (in terms of sampling error) are sensitive to relatively small differences in distributions.

Appendix V: Federal Judiciary Proposed Coversheet for Reaffirmation Agreements

Appendix VI: GAO Contact and Staff Acknowledgments

William O. Jenkins Jr. at (202) 512-8777 or jenkinswo@gao.gov.

Acknowledgments

In addition to the contact named above, Linda Watson, Assistant Director; Pille Anvelt; James Ashley; Ben Atwater; Amy Bernstein; Carlos Garcia; Daniel Garcia; Geoffrey Hamilton; Lemuel Jackson; Ronald La Due Lake; Brian Lipman; Grant Mallie; Jamilah Moon; and Johanna Wong made significant contributions to this report.