After the debtor filed bankruptcy and the debt was discharged, the bank rewrote the loan.

It is noteworthy that no new “consideration” was given for the rewritten note; even if there had been new consideration, the rewritten note would have probably been enforceable only as to the new consideration. 

The definition of “consideration” includes a new advancement of money or some other new bargain entered into between the lender and borrower.

The court noted that a formal reaffirmation agreement entered with the court would have been enforceable, however, the bank failed to enter into such a reaffirmation agreement and file the same with the court.

Consequently, the court found that the bank’s attempt to rewrite the debtor’s note without having entered into a formal reaffirmation agreement with the bankruptcy court constituted an attempt by the creditor to coerce repayment of an otherwise discharged debt. Ruling: Judgment entered in favor of the debtor and the creditor would lose more than $31,000.

EDITOR’S COMMENT: Credit unions are often requested by a member to rewrite a loan that would otherwise be discharged in bankruptcy. The debtor intends to retain his/her benefits at the credit union by rewriting the original note and agreeing to repay the debt.

The credit union has an obvious interest in having an otherwise discharged debt paid to the credit union. Both parties at that point in time have an interest to enter into an agreement that is not formally entered with the bankruptcy court.

Maneuvers of this nature, however, are susceptible to scrutiny and are, in most instances, determined to be unenforceable contracts entered into for debts that were discharged in bankruptcy.

If your credit union intends to rewrite a note during debtor’s bankruptcy without the benefit of a formal reaffirmation agreement, please consult your attorney.

Author: Charles R. Harroun, Attorney at Law