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WASHINGTON-Credit unions have more to lose than other financial institutions when it comes to the reaffirmation provisions in the bankruptcy reform bill (H.R. 333). Congress is running out of time on its fifth try in recent history to get a reform package passed. According to CUNA Vice President and Senior Legislative Counsel Gary Kohn, if the bankruptcy legislation is not approved, “there will be changes by the courts that would apply to everyone, including credit unions.” The courts have decided to take upon themselves the task of creating a uniform reaffirmation agreement form, he said. If the law is not changed they could do this before lawmakers are able to change the law. In H.R. 333, there is a separate agreement form for credit unions, which varies slightly from the one applying to other financial institutions. Currently, each court simply uses a form that it likes or has no form at all, Kohn explained. While some judges are philosophically opposed to reaffirmations, he said, the changes to the law will “actually confirm that reaffirmations are an appropriate tool.” NAFCU Senior Lobbyists Murray Chanow said that the original reaffirmation language was three lines, but now has been expanded to a whopping 40 pages. He said that the separate form for credit unions was helped along by a 1997 study by the National Bankruptcy Review Commission, which found: “Credit unions generally seem to scrutinize the creditworthiness of their members before extending credit, and they work closely with their members facing financial difficulty. The results of their practices pay off: credit unions’ charge-offs are only a tiny fraction of the losses of most credit card issuers.. If a debtor files for bankruptcy, credit unions, like other creditors, use reaffirmation agreements to cut their losses on riskier consolidation loans, but also as a tool in their efforts to work with bankrupt members.. It may be worthwhile for congress to study more closely the question of whether nonprofit credit unions that work with their bankrupt debtors as part of an education and credit rehabilitation program should be treated differently from other creditors as a general matter.” The differences between the reaffirmation forms for credit unions and other lenders are slight but important, the lobbyists said. The credit union alterations are found on the last page of the agreement where, in other lenders’ agreements, the filer’s attorney must certify that the terms of the reaffirmation agreement will not cause “undue hardship.” In the credit union form, there is no presumption of “undue hardship.” Additionally, in the `Debtor’s statement in support of reaffirmation agreement,’ the filer must explain in detail his/her monthly income, monthly expenses, and how much is left over. “I understand that if my income less my monthly expenses does not leave enough to make the payments, this reaffirmation agreement is presumed to be an undue hardship on me and must be reviewed by the court. However, this presumption may be overcome if I explain to the satisfaction of the court how I can afford to make the payments the section of the reaffirmation agreement for lenders other than credit unions reads. On the other hand, the credit union agreement simply states that the agreement is in the filer’s financial interest. Chanow explained that, under the legislation currently stalled in Congress, if a bankruptcy filer is represented by an attorney, a fully informed and voluntary agreement must be filed with the court upon reaffirmation of certain debts. If the filer is not represented by an attorney, reaffirmation of unsecured credit must be approved by the courts. Eighteen months after the enactment of the potential bankruptcy legislation, the General Accounting Office has been commissioned to perform a study of how consumers are treated under the revised reaffirmation provision. The study will investigate lenders’ policies and practices and if consumers are being treated fairly, Chanow explained. “I think it will show that credit unions will have a much better record than others do,” CUNA’s Kohn said. “I don’t know if 18 months is enough time. We’ll have to see,” Chanow commented. However, the six-month period between the bill being signed into law and being enacted, he forecast, should produce a “rash” of filings in the bankruptcy courts across America with filers trying to take advantage of the current system in its eleventh hour. While credit unions typically are not at the heart of the problem, The Golden 1 Credit Union in California was involved in a lawsuit in 1999 because it did not file 500 reaffirmations with the bankruptcy court. Each of the 500 members (out of a total of approximately 15,000 reaffirmations during the same five-year period) that reaffirmed had not been represented by an attorney. The credit union maintained that agreements that were not filed were accidental and the matter was settled out of court for $1.4 million. A similar case was slapped against Sears prior to The Golden 1 case, where the judge felt the company was intentionally not filing reaffirmation agreements it knew a judge would reject. [email protected]

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