VIDEO: In this video, U.S. Bankruptcy Court Judge Eileen W. Hollowell discusses the issues and choices available to debtors in bankruptcy with respect to debts secured by loans on motor vehicles and homes, including the pros and cons of redemption and reaffirming a secured debt.If someone files a bankruptcy while having secured property (a mortgage, car loan, store property, etc,) they will have to advise the secured lenders that they want to either:
Option 1- Surrender
The collateral may be surrendered back to the lender who will sell the property and apply the proceeds to the outstanding balance of your loan. Assuming your case completes and you receive a discharge, any deficiency balance owed on the property will be eliminated in the bankruptcy. This is a good option if you are unsure you will be able to make the payments moving forward, or if the collateral is damaged and you owe more than the property is worth.
Option 2- Reaffirm
This option has legal consequences that should be considered carefully before a decision is made. A reaffirmation agreement is a contract that puts the debtor “back on the hook” for the debt despite the bankruptcy. This is the downside of reaffirming a debt. If you default in the future at any time, the creditor can repossess the collateral AND sue you for any deficiency balance you may owe. The only benefit of reaffirming a debt is that the payments made after the debt is reaffirmed are reflected on your credit report to help you begin to reestablish credit. That being said, there are many other things you can do to reestablish credit after a bankruptcy without reaffirming, and this alone should not be the sole consideration in making a decision to reaffirm. If you decide to reaffirm, make sure you READ the agreement carefully… for example, watch out for balloon payments that still weill be due. Most creditors require that you be current on your payments to reaffirm.
Option 3- Retain and Pay
Regarding personal property, most secured lenders will continue to accept your monthly payments and allow you to keep the collateral even if you haven't indicated intent to reaffirm your debt. This is known as the “retain and pay” option. It is an informal option not specifically recognized by the Bankruptcy Code. Retain and Pay is an attractive option if the lender will accept it. However, debtor's choosing this option must be comfortable with a lack of certainty or predictability. Some lenders like Ford Motor Credit, GMAC and Daimler Chrysler state they will repossess vehicles unless the debt is timely reaffirmed. Other lenders like Toyota typically feel that it is better to receive monthly payments under the informal “retain and pay” option rather than lose money by selling repossessed vehicles at auction prices. It is possible, however, that you think your lender has decided to continue to accept your payments only to learn the lender wants the vehicle back, as the secured creditor still maintains their security interest in the property, until paid in full. In any case you are not legally responsible for the debt. In regards to real property, your homestead cannot be taken from you, as long as you pay your mortgage (and are current).
Option 4- Redeem
Bankruptcy law allows debtors to “redeem,” or buy out personal property secured by liens for the market value of the property rather than what's owed on it. The downside here is that you must pay the lender the market value in a lump sum which is difficult for most. There are lenders who will finance a loan for the market value of the property, however the interest rates are high and should be factored into the overall net benefit to the debtor.
Basically, reaffirmation means you're re-obligating yourself for the debt. If you do reaffirm and are later unable to keep up the payments, the creditor could make collection calls, send collection letters, sue you, or foreclose on your property. In some cases a client wants to reaffirm, but it is not an option recommended by The Hixson Law Firm absent special circumstances (i.e. creditor agrees to lower your interest rate or reduces your principal balance). If you don't reaffirm and choose to ‘retain & pay' by keeping current on payments, you may later give up the property if you decide to without being liable for any deficiencies, as the underlying debt has been discharged.
Facts / Timelines
When we file your bankruptcy we are required to file a Statement Of Intention regarding your secured property. You must have your purple sheet completed and signed.
A debtor may repay as many dischargeable debts as desired after filing under chapter 7. By repaying one creditor, a debtor does not become legally obligated to repay any other creditor.
The law requires you to “perform” your intentions regarding financed personal property within 60 days of the Meeting of Creditors (341). So if you are going to reaffirm, get it done early, or you may miss your opportunity.
A reaffirmation agreement can be canceled anytime before the court issues your discharge or within 60 days after the agreement is filed with the court, whichever gives you the most time.