HSBC Reaffirmation Agreements Don't Quite Add Up: Are the Errors ...

I've got a reaffirmation agreement to sell you...

Problems With Reaffirmation Agreements of HSBC Subsidiary

A couple months ago, I got a call from a prospective client (who we?ll call Jim). At the time he called, Jim was involved in a pro se adversary case involving a dispute over the terms of a reaffirmation agreement. As I learned more and dug deeper, it started to look more and more likely that there was something going on in Jim?s case that didn?t pass the smell test. I?ve outlined the important facts of the case below so bankruptcy attorneys will be on the lookout for these types of reaffirmation schemes in their jurisdictions.

Pro Se Debtor Contacted About Mortgage ?Modification?

In 2010, Jim filed a pro se chapter 7 bankruptcy case stating his intention to surrender his underwater home. At the time of the bankruptcy, Jim?s home was in foreclosure, but had not yet been sold. Before Jim received his bankruptcy discharge, he was contacted by a representative at Household Finance Corporation II, a subsidiary of HSBC, who called to gauge his interest in reaffirming his mortgage debt. After many failed attempts at a modification, Jim was surprised that Household Finance offered to slash his interest rate from 10.99% to 5.25% while he was in bankruptcy, but he found the modified rate too attractive to pass up and agreed to reaffirm the debt.

Letters From Lawyers

In October, 2010, Jim received a letter and form reaffirmation agreement from John D. Schlotter of Aldridge & Connors, LLP in Atlanta, GA. Aldridge & Connors represents Household Finance Corp. in reaffirmation proceedings nationwide. Mr. Schlotter explained in his cover letter that the reaffirmation agreement contains

a ?rate modification reducing the annual interest rate on this loan to a fixed rate of 5.25%.? Mr. Schlotter goes on to explain that ?if the amount of income is less than total expenses, leaving a balance less than the amount needed for the monthly mortgage payment, then a presumption of undue hardship arises and an explanation must be provided.?

The Reaffirmation Hearing

Jim (remember he was pro se) amended his bankruptcy schedules, including Schedule J, to reflect the reaffirmation payments and motioned the Court to approve the reaffirmation agreement. A hearing was required because Jim was not represented by an attorney and the addition of the monthly mortgage payment put his monthly expenses approximately $2,500 below his monthly income. In November, 2010, the Bankruptcy Judge approved Jim?s reaffirmation agreement, but not without some hesitation. In rebutting the presumption of undue hardship, Jim pointed out that he was to receive a car from family and would therefore be able to surrender his current automobile to cut expenses. According to Jim, the Judge commented that ?this was one of the largest reaffirmation agreement payments he had approved?, but approved nonetheless on the strength of Jim?s amended budget which, after surrendering the car, still showed a monthly shortfall in expenses versus income.

The Trouble Begins?

Approximately five days before receiving his discharge order, the trouble began. Jim received a letter informing him of his right to cure defaults under the reaffirmation agreement as well as his first invoice for approximately $13,000 which included back property taxes paid by Household Finance Corporation, II. This was the first invoice Jim ever received. He was surprised to learn that he was already in default and that he was being charged for back taxes not disclosed in the reaffirmation agreement. The invoice was more than $10,000 above what he?d agreed to. Notably, section B of the reaffirmation agreement specified the amount reaffirmed as $617,892.92, which was Jim?s mortgage balance, including interest and penalties. By the reaffirmation agreements? express terms, the amount reaffirmed incorporated ?the entire amount? including ?unpaid principle, interest, and fees and costs (if any)? which arose on or before the date of the reaffirmation disclosure statement. Back taxes were not disclosed as a cost or fee.

Payments Don?t Add Up to the Amount Reaffirmed

With his suspicions raised, Jim found additional problems with his reaffirmation agreement. He realized that the sum of his payments amounted to a total far greater than what he?d agreed to reaffirm. Jim agreed to an annual interest rate of 5.25% on reaffirmed mortgage debt of $617,892. He agreed to make payments of $2,268.64 per month for 328 months starting in the month after the filing of the reaffirmation agreement. However, under the payment schedule listed in the reaffirmation agreement (328 payments of $2,268.64) he would pay $744,212.32 not $617,892 as he agreed. Over the life of the reaffirmation agreement, he was being overcharged by $126,320.32!

There Seems to be a Pattern

As Jim investigated further on PACER, he found repeated irregularities with Household Finance Corporation reaffirmation agreements in numerous states. Some, like his, overcharged. Others contained amortization schedules that fell far short of the amount reaffirmed, leaving borrowers with an undisclosed balloon payment at the end of their repayment term. A lump sum payment that would almost certainly push many of them into foreclosure, just at the time they though they had their home paid off. ?Outraged, Jim filed an adversary case, again pro se. It wasn?t until just before the Judge decided to throw out the reaffirmation agreement as void due to mistake that I caught wind of what was going on. I imagine that other Bankruptcy Courts would take a very different approach if they knew that the problems with Household Finance Corporation reaffirmation agreements are systemic and not just an isolated scriveners error. In all the cases Jim and I took a look at, we didn?t once see a Household Finance mortgage reaffirmation that added up to the actual amount reaffirmed.

HSBC?s ?Position?

In Jim?s adversary case,?HSBC argued that deferred interest payments of approximately $150,000 as well as attorneys? fees of approximately $10,000 were due and payable at the ?end of the repayment term? per the reaffirmation agreement contract. They also contended that additional fees were owed on top of Jim?s monthly payment (presumably why his first invoice was high by more than $10,000). HSBC makes an interesting argument because none of the fees they claim Jim owes were disclosed anywhere in his reaffirmation contract. Per section 524(K)(3)(C)(ii) of the Bankruptcy Code the ?Amount reaffirmed? must include the total of ?any fees and costs accrued as of the date of the disclosure statement.??Was HSBC arguing that Jim owed more in fees, even after the bloated monthly payments ceased? I?m not sure even they know, but here is a quote from their pleadings:

?Plaintiff was unaware of these existing repayment obligations under the reaffirmation agreement and filed this lawsuit because he never intended to be liable for the additional amounts that defendants seek to collect?in addition to the 328 payments of $2268.64 for principal and interest under the reaffirmation agreement.?

In addition to the 328 payments of $2,268.64? Really? The reaffirmation cover sheet?listed $0.00 in ?monthly payments not listed on Schedule J.??Certainly something debtor?s attorneys may want to look into.

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