Posted by David Leibowitz on May 10th, 2009 in Bankruptcy procedures, BAPCPA, Chapter 13, Chapter 7, Reaffirmation Agreement
If you are buying something on credit, like a car or a house, this is called a secured debt. In bankruptcy, you need to make choices about your secured debt. There are three options and maybe a fourth one too. These are called:
- Reaffirm or reaffirmation
- Redeem or redemption
- “Pay and Retain” or “Ride-Through” – the 2005 bankruptcy law tried to abolish this but was not completely successful
Here’s a brief explanation of each one:
Reaffirmation: In this instance, you, the debtor, agree to continue to pay the debt to the secured creditor, like GMAC or Ford Motor Credit. In exchange, you keep your car and keep paying your monthly payments just as you did in the past. Sometimes, your bankruptcy lawyer can help you negotiate a better deal with the lender in order to persuade you to reaffirm the debt. Maybe the lender will agree to do this because it is better off with you paying than it is for the lender to sell the car at a loss at auction. If you don’t reaffirm a debt secured by a vehicle, you run the risk of having the car repossessed or taken away from you outside of bankruptcy. This will almost certainly happen in Illinois and is likely to happen in Wisconsin too. Laws do vary in other states.
If you decide to reaffirm, your lawyer needs to certify that you can afford to do so. That’s why we charge a little extra for each reaffirmation agreement – we need to be sure we can give this certification taking into account your economic situation after bankruptcy. Otherwise, you’d have to go to court to explain to the judge why you can still afford this secured debt.
Surrender: Here, you decide that you can’t afford to keep a property securing the debt. Maybe your car is too expensive, or not worth much compared to the loan. Maybe it would pay you to give up the car and try to get another less expensive vehicle rather than keep paying on it. In this case, you’d give up the car and be discharged from debt on the balance. Surrender is often the right choice when you are deeply underwater or “upside-down” on your the mortgages on your house.
Redemption: This is sometimes a good choice when you have a late model car which has substantially declined in value compared to the loan, especially when you have a high interest rate. If you have the money, maybe from an IRA or even better, from a new loan, you can pay off the loan on your car for the present value of the car. For example, if your car is worth $15,000 and the loan is $30,000, you can get a new loan for $15,000 and discharge the remaining $15,000 in your bankruptcy case. This could result in a much lower payment for the balance of your loan. Ask us about redemption. We know how to do this – there’s an additional fee but in many cases, it’s worth it.
“Pay and Retain” or “Ride-Through” You can’t do this any more for personal property. However, we have found that you don’t have to reaffirm a debt secured by your house in order to keep paying it as normal. This is a good option since you maintain your mortgage as normal, but no longer have personal liability in the event that you default in the future. Ask us about this too.
Statement of Intention: One of the papers you’ll sign in your bankruptcy case is a “Statement of Intention”. On this paper, you’ll tell your creditors whether you want to keep your property and keep paying on it, surrender the property and be discharged from the debt or redeem the property by paying the current balance. Look this paper over carefully and make sure it’s correct
Some retail stores claim a security interest or lien in items like jewelry or computers. If you have this situation, let us know. We have some ideas which can help you.
Act on your intentions – Remember, you have to act on your intentions promptly, so when we send you a reaffirmation agreement, read it, make sure you agree with the terms, sign it and return it right away. And call us if you have any questions about any aspect of a reaffirmation agreement.