The Typical Co-Debtor Protection
In most circumstances, when only one co-debtor files for bankruptcy protection, the non-filing co-debtor usually can maintain the property provided that the co-debtor continues to make timely payments. An interesting situation arose in a recent case. The particular property is a boat. Husband and wife both signed for and are responsible for the debt owed to the boat financing company. It turns out that husband was forced to file a chapter 7 bankruptcy case. The lender with the boat as security sent a reaffirmation agreement seeking to have the debtor reaffirm that debt despite the fact that there was a non-filing co-debtor spouse. When I contacted the lender’s attorney, I pointed out the fact that only one party to the note was filing for bankruptcy and that the non-filing spouse would continue to make the payments per the agreement. The attorney then told me that she would provide documentation concerning the loan since her client was insisting that the debtor sign the reaffirmation agreement if the boat was going to be maintained by either spouse.
The Security Documents
When I received the security documents, I read very closely the section regarding default. The agreement read that a default by either party would constitute a total default and the lender could exercise its remedies against either party. This is the first time in my career that I have seen a security document which basically provided for default against both parties in the event there was a bankruptcy against one party. Now I do not know if the bank would actually attempt to repossess the boat if the non-filing spouse continued to make timely payments. I also do not know if a court of competent jurisdiction would find that clause to be valid. It is my belief that when you have joint and several liability, then the bankruptcy filing of one spouse should not trigger a default against the non-filing spouse who is making current payments. However, in this particular case, I did not want to test the waters. Therefore, I advised my client to go ahead and sign the reaffirmation agreement on the boat despite the fact that he had no obligation to do so and despite the fact that there was a non-filing spouse who was going to continue to make payments.
When Multiple Interpretations Exist
When you have a situation where there could be multiple interpretations of a contract and you’re talking about a significant piece of property in this boat, it makes sense to error on the side of caution and to have the debtor agree to reaffirm so as not to trigger a default. I truly do not believe the bank would seek to repossess the boat if the debtor did not agree to reaffirm. However, I do not want to get a phone call six months from now stating that the boat was taken simply because my client did not sign a reaffirmation agreement when the client clearly indicated that he wanted to keep and pay for the boat.
My hope is that other lenders don’t utilize this default provision. I believe it sets up a very perilous situation for an attorney who blindly tells a client not to reaffirm a debt since there’s a non-filing spouse or other co-debtor on the debt. I believe that at some point a particular lender will take action and test the waters. Thus, it is extremely important that you provide all documentation regarding debts to your attorney. This includes security documents, credit card agreements if you have them, and any other document relating to debt. If you do so, your attorney is going to be able to review the situation and offer the best remedy to the issue.
