By Ryan C. Wood
Generally, if you have secured debt when you file for bankruptcy, you have three options: 1) surrender, 2) redeem, or 3) reaffirm the debt. The 2005 bankruptcy reforms have made it difficult for bankruptcy lawyers to provide advice regarding reaffirmation agreements. Prior to the 2005 bankruptcy reforms you could just keep making your normal car payment if you were current on the payments and wanted to keep the vehicle. Now bankruptcy attorneys are asked to sign off on a reaffirmation agreement as to whether it is in the best interest of a client or not.
The first option is self explanatory; you can surrender your property to your lender and not be liable for any deficiency relating to the surrender of the property in your bankruptcy case.
The second option is to redeem your property for the fair market value of the property. This is advantageous if your debt is significantly higher than the fair market value of the debt. You would only have to pay what your property is worth, not what you owe to the lender. However, the only catch is that you have to pay the lender the fair market value of the property in one lump sum payment. Most people don’t have that amount of cash readily available; however, there are companies out there that specifically help with redemption of properties after the filing of a bankruptcy petition.
The third option is to reaffirm your debt. After the filing of your petition, if you have secured debt, such as debt for your house or vehicles, chances are, you may receive a reaffirmation agreement from your lender to reaffirm your debt. A reaffirmation agreement is a new contract that you sign after you have filed your petition that essentially indicates that you promise to continue making payments on your property. Although it is the current law that you must indicate your intention to either surrender or reaffirm your debt, it is normally not advisable to sign a reaffirmation agreement because you never know what the future holds. However, sometimes the lender makes the contract more attractive by either significantly lowering the interest rate or balance due on the remaining balance. If that occurs, it is up to you to weigh the pros and cons of signing a reaffirmation agreement. Better terms on the reaffirmation agreement is a great incentive to sign the reaffirmation agreement, but only do so if it does not present an undue hardship for you to pay that amount every month. One of the disadvantages of signing a reaffirmation agreement is if at any time in the future, you are unable to continue making the promised payments, the lender can repossess your property and still pursue you for any deficiencies even though you had filed for bankruptcy. Bankruptcy does not protect you from any debts relating to post-petition contracts signed, which is what a reaffirmation agreement is.
An unspoken fourth option is to continue making payments on your property without signing a reaffirmation agreement. You may make prompt monthly payments to your lender and continue to keep your property. If, at any time in the future, your finances suffer and you are unable to continue making payments, you can surrender your property, and the lender would not be able to pursue you for the deficiency since the debt was discharged along with all your other debts in your bankruptcy petition. Although the current law indicates that you need to indicate your intention to either: surrender, redeem, or reaffirm your debt, chances are, if you are making prompt payments on your property, it would not make good business sense for the lender to repossess your property. However, there are certain companies that will repossess your property regardless of whether you are current on your debt if you did not sign a reaffirmation agreement. Thus, there is a risk if you do not sign the reaffirmation agreement that your property may be repossessed.