Question

Federal Bank is a secured party on a $50,000 loan to Gigi, who owns Home HealthCare, an assisted living facility. When Gigi experiences financial difficulty, creditors other than Federal Bank petition her into involuntary bankruptcy. The value of the secured collateral has substantially decreased in value. On its sale, the debt to Federal Bank is reduced to $25,000. Gigi’s estate consists of $100,000 in exempt assets and $20,000 in nonexempt assets. After the bankruptcy costs and back wages to Gigi’s employees are paid, nothing is left for unsecured creditors. Gigi receives a discharge in bankruptcy. Later she decides to go back into business. By selling a few exempt assets and getting a small loan, she is able to buy Indulgence, a small, profitable nightclub. Gigi goes to Federal Bank for the loan. The bank claims that the balance of its secured debt was not discharged in Gigi’s bankruptcy. She signs an agreement to pay Federal Bank the $25,000, and the bank makes a new unsecured loan to her. Is Federal Bank correct that the balance of its secured debt was not discharged in bankruptcy? What is the legal effect of Gigi’s agreement to pay the bank $25,000 after the discharge in bankruptcy?

Answer 1

A secured creditor is eligible to precedence to the takings from the removal of the secured collateral of the insolvent debtor up to the amount of the debt owed. Should the earnings not cover the secured debt, the secured party befits an unsecured creditor for the balance. Lest the debtor is deprived of a absolution in bankruptcy, all debts of the debtor are rendered invalid on the permitting of the discharge. In this case, Federal Bank is incorrect. Federal Bank became an unsecured creditor to the balance of $25,000 owed. Gigi’s discharge in bankruptcy discharged her obligation to pay the debt.

            The Bankruptcy Code limits the legality of confirmations—agreements to pay debts discharged in bankruptcy. For these agreements to be obligatory, they must be completed before the discharge in bankruptcy is approved. All reaffirmation agreements must be filed with the court. Unless the debtor (Gigi) is denoted by an attorney, court approval is essential. The court will only approve the reaffirmation if the agreement will not cause the debtor a hardship and is in her best interests. If Gigi is denoted by an attorney, the attorney must file a statement or affidavit affirming that Gigi was fully informed of the consequences, the agreement was willingly made, and the agreement does not levy a hardship on Gigi or her dependents. Gigi has a right to annul this agreement. Because the reaffirmation agreement in this case was made after Gigi’s release in bankruptcy, she is not legally indebted to pay the $25,000 debt previously discharged in bankruptcy