There is a lot of information about reaffirmation agreements floating around out there. When a creditor in your case sends me a reaffirmation agreement, I’m going to send it to you with a cover letter and this memo describing the process of reaffirmation.

INFORMATION ABOUT REAFFIRMATION AGREEMENTS

When a creditor has a lien on any of your property you can choose to surrender the property to the creditor in satisfaction of the debt.  You can also choose to retain the property secured by a lien.  If you choose to retain any property secured by a lien, you must make an additional choice to let the creditor know how their claim is to be treated: (a) you can reaffirm the debt or (b) you can redeem the property from the lien. The best way to illustrate these choices is by using the example of a financed motor vehicle, although the discussion holds true for any property secured by a consensual lien (a lien you voluntarily give to the lender as opposed to a lien imposed on your property, without your consent, by judgment or by law).

A motor vehicle loan involves two separate obligations.  First, you sign a “promissory note” when you buy a car.  This is your written promise to the lender repay the borrowed money (sort of an elaborate I.O.U.).  Second, you give the lender a lien (a property right) in the vehicle to secure repayment of the promissory note.  The lien gives the lender the legal right to repossess the vehicle and to sell it, without first going to court, if you fail to pay as required under the promissory note.  When the vehicle is sold, if there are excess proceeds, they belong to you.  If there are not enough funds raised by sale to fully satisfy all amounts due to the lender, then you are still responsible for the “deficiency” under your promissory note.

When you receive a bankruptcy discharge, your obligations under the promissory note are discharged.  So you technically have no obligation to continue to pay for the vehicle.  But the lender’s lien is not affected by this discharge and continues to encumber your vehicle.  So, if you stop paying for the vehicle the lender can enforce its lien rights by repossessing the vehicle and selling it. Naturally the lender will receive significantly less at sale or auction than is still due under the promissory note.  But, you are no longer responsible to pay any deficiency because your personal obligation to do so under the promissory note has already been discharged.  The lender is therefore left only with the ability to rely on the sale price of the vehicle after a bankruptcy unless you continue to pay for it.

1. Surrender of Property Secured by a Lien

To balance the rights of the parties, the Bankruptcy Code requires the Debtor to make a choice on how the lender’s claim is to be treated and that choice must be indicated on the Statement of Intention.  First, the collateral (in this case a motor vehicle) may be surrendered to the lender.  If the motor vehicle is to be surrendered the lender will get it back much more quickly, without the cost incurred by a repossession and can maximize its recovery by selling the vehicle more quickly.  If there is a deficiency after surrender and sale, you are not obligated to pay it since the vehicle is surrendered in full satisfaction of any claims the lender may have against you for any further payment.  It is useful to consider surrendering collateral if you will have difficulty making continued payments to the lender or if you can get by without the property.

If you want to retain the property or must retain the property because you can’t get by without it and you won’t be able to find an affordable replacement, then you must either “reaffirm” the debt or “redeem” the property from the lien.

2. Redeeming Property from a Secured Lien

If you want to keep collateral subject to a lien, but don’t like the idea of reaffirming a debt, you may also consider redeeming the collateral from the lien. Redeeming property from a lien involves paying off the entire amount of the lien in one lump sum.  For redemption purposes, the value of the lien is the value of the collateral securing it.  This choice is worth considering with car loans, especially when the vehicle is worth substantially less than the amount still owed on it.

For example if your car is worth $1,000.00 but the debt still due is $6,000.00, it wouldn’t make sense to reaffirm the debt.  Instead you can redeem the car from the lien by paying the lender the value of the car (which is the value of the lender’s secured position) in one lump sum.  The car will no longer be encumbered by the lien and you will not have to make any more payments to the lender.  You have in effect “cashed-out” the secured portion of the lender’s claim.

Redemption is also an attractive choice for addressing liens in smaller consumer items like a computer which is encumbered by a “consumer lien” because you bought it on a Circuit City credit card.  It is less attractive for property that still has significant value, like some newer cars, because it may be impossible for you to gather enough money to fully pay off the current value of the property in one lump sum.  However , some lenders now provide “redemption” financing for debtors.  They will advance the amount needed to redeem property, typically on a short-term basis, and typically at a high interest rate.

Redemption of property must be accomplished by filing a motion with the Court.  Remember that if you want to redeem property the preparation and filing of the necessary motion is an extra service for which there is an additional charge.

3. Reaffirming Secured Claims

Reaffirming a secured debt involves agreeing to pay the full amount of the debt after you receive your bankruptcy discharge.  If you choose this option on the Statement of Intention then you are agreeing to be responsible for any future deficiency that may arise after a future repossession and sale of the car despite the fact that such debts would have been discharged in the chapter 7 bankruptcy proceeding.  Naturally no one plans to default on future car payments, but, if you do, and if you have reaffirmed this debt, then you will still be responsible to pay any deficiency.  So if you run into financial trouble after your case is completed, you might find yourself without the car and also still responsible to pay the balance of the loan because you reaffirmed the debt.

The agreement must be filed with the Bankruptcy Court before your discharge is entered or else it will not be effective.  Your attorney is also asked to sign a certification stating that your agreement to reaffirm a debt will not place an undue financial hardship on you.  If the attorney cannot sign such a certification because he or she believes that it does pose an undue financial hardship on you, then the Court must hold a hearing to consider the propriety of allowing the reaffirmation agreement to be entered.  You will have to appear at this Court hearing to explain why the agreement will not unduly burden you financially.  If the Judge is satisfied, the agreement will be entered.  If the Judge thinks the agreement is a financial burden, the agreement will not be entered.

Remember that if you have filed a chapter 7 case, you probably don’t have significant excess monthly income and it may be impossible for us to certify the propriety of a proposed reaffirmation agreement consistent with our independent duty of investigation and candor toward the Court.  So it is quite likely that you will have to appear before a Judge in most cases to have the reaffirmation agreement entered.  Also remember that if you want us to appear at this hearing with you it is an extra service for which there is an additional charge.

4. Retain and Pay (A Possible Fourth Option)

Some secured lenders will continue to accept your monthly payments and allow you to keep the collateral even if you haven’t indicated an intent to reaffirm their debt or to redeem the vehicle (or other property) from their lien.  This is known as the Retain and Pay option or the “Fourth Option”.  It is an informal option, not explicitly recognized by the Bankruptcy Code, but also not specifically forbidden by it either.  It can be chosen on the Statement of Intention.

This is an attractive option for vehicle loans if the lender will sit still for it.  If you can keep a vehicle without reaffirming the debt, you can protect yourself from a potential future deficiency in case you default in future payments and the car is repossessed and sold.  Since you haven’t reaffirmed the debt the bankruptcy discharge has eliminated any responsibility you have to pay any deficiency.  And, if you can keep the vehicle without redeeming it, you will not have to come up with a potentially large one-time lump sum payment for the lender.

The problem with this option is that you will never know whether a lender will sit still for it.  Some car lenders like Ford Motor Credit Company have let it be known that they will repossess all vehicles unless the debtor timely reaffirms or redeems.  Some lenders, like Toyota, feel that is better to continue to receive monthly payments under the informal “retain and pay” option rather than to take a beating by selling repossessed vehicles at auction prices.  Others have made no statements one way or another on the topic.

So, you may attempt to informally “retain and pay” for a vehicle and the lender may continue to accept your payments for some time, only to repossess the vehicle many months later even though you were current on all post-bankruptcy payments.  You may think the lender has decided to continue to accept your payments under the “retain and pay” option only to wake up one morning and find your vehicle gone.

Some attorneys argue that if a vehicle lender continues to accept post-bankruptcy payments under an informal “retain and pay” option, the acceptance of payments acts as a waiver of the right to repossess the vehicle unless and until there is an actual default in payments. Unfortunately, this point of law is not yet clear.  Until this issue is settled by court decisions, there is inherent risk in taking this course of action.  Make sure you carefully discuss these options with us before making any decisions on how to fill out the Statement of Intention.

5. Post-Filing Payment Statements for Mortgages and Car Loans

Some secured creditors (mortgage companies and car lenders) will attempt to coerce you into reaffirming their debt by refusing to send you any further payment statements after you file a chapter 7 case unless you reaffirm their debt.  They will claim that doing so could be construed as a violation of the automatic stay.  The Bankruptcy Courts have issued a standing order that clearly permit such creditors to send monthly post-bankruptcy installment payment notices. You do not have to reaffirm a debt to continue receiving these monthly payment statements.

These lenders are also probably hoping that by refusing to send you post-bankruptcy payment statements you may not have the address, account information and/or payment amount required to make post-bankruptcy payments.  The lender may believe that if you fear not getting any more payment statements, which may lead to an unintended payment default on your part, you may be more likely to reaffirm their debt to once again begin receiving these payment statements.

To prevent this, and to protect yourself , make a copy of all of your most recent mortgage and car loan statements so that you can make post-bankruptcy payments even if the lender stops sending you payment statements.

When you’re ready to get out from under the crushing debt load and begin a new debt-free life, contact Dallas bankruptcy lawyer Rustin Polk by clicking here. Tell our Appointments Coordinator, Cindy, that you are a website reader and she will set you up with a free, no obligation appointment to learn how we can help you.