When a person is short of money, he may ask for a loan. Usually the more desperate the person’s financial situation, the higher the interest rate becomes – and the greater the creditor’s risk that the individual will file for bankruptcy protection. In order to manage that risk, some loan contracts contain bankruptcy waivers.
A bankruptcy waiver is an agreement that the borrower will not file bankruptcy and discharge the debt. Courts consider these waivers unenforceable and are considered void against public policy. See Klingman v. Levinson, 831 F.2d 1292 (7th Cir. 1987); see also In re Citadel Properties, Inc., 86 B.R. 275 (Bankr. M.D. Fla. 1988)(“A total prohibition against filing for bankruptcy would be contrary to Constitutional authority as well as public policy”).
While courts agree that an agreement that impairs a party’s ability to file for bankruptcy protection is void, courts have disagreed when it comes to waivers of specific bankruptcy protections. For instance, a secured creditor may include a provision that waives the automatic stay on the real estate, which will allow the creditor to quickly obtain relief from the automatic stay and proceed with a foreclosure or repossession. The creditor must still seek an order lifting the stay from the bankruptcy court, but the waiver provides evidence of the debtor’s consent and reason for the court to lift the stay protection. See In re Cheeks, 167 B.R. 817 (Bankr. D.S.C. 1994).
A pre-petition bankruptcy waiver is generally binding on the debtor unless it was obtained by coercion, fraud or mutual mistake of material fact. See In re South East Financial Associates, Inc., 212 B.R. 1003 (Bankr. M.D. Fla. 1997). These waivers are not binding against third parties, like creditors or the bankruptcy trustee. Consequently, if a waiver affects the rights of other creditors in the bankruptcy case, a court is not likely to enforce the waiver. Some courts look to a series of factors to determine if the waiver is enforceable and valid, including:
(1) the sophistication of the debtor,
(2) the consideration for the wavier,
(3) whether other parties or creditors are affected, including unsecured creditors and junior lienholders, and
(4) the feasibility of any Chapter 11 or 13 repayment plan.
See In re Sky Group International, Inc., 108 B.R. 86 (Bankr. W.D. Pa. 1989).
Pre-petition bankruptcy waivers are serious business, and it is always best to avoid them. However, if your loan agreement contains a bankruptcy waiver and your finances have taken up permanent residence in Brokeville, consult with an experienced bankruptcy attorney regarding your rights under the federal bankruptcy Code.