Reaffirmation and Redemption in Chapter 7
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What happens to mortgages and car loans in Chapter 7 bankruptcy?
A chapter 7 debtor has three options when it comes to secured debt (debt secured by collateral, such as a mortgage or a car loan):
To redeem the collateral or to re-affirm the debt, a Chapter 7 debtor is required to file a statement of intentions within 30 days of the bankruptcy petition filing and perform the stated intention within 30 days after the meeting of creditors.
What is a reaffirmation agreement?
A reaffirmation agreement is a contract between the debtor and a creditor under which the debtor promises to pay the debt that would have otherwise been discharged in bankruptcy. If the debtor defaults on the reaffirmed debt after bankruptcy, the creditor can not only repossess or foreclose on the property securing the debt but can also obtain a deficiency judgment against the debtor. The judgment will give the creditor a right to garnish the debtor’s wages and/or a bank account, and/or place a judgment lien on debtor’s real and personal property.
Should you reaffirm a secured debt?
There are several reasons why the debtor may want to re-affirm a secured debt (debt secured by collateral). First of all, the debtor may want to keep the collateral, such as a car, a house, a household appliance, or a water softener system. Second, the debtor may want to preserve a relationship with a particular creditor. Third, the debtor may agree to settle a debt that may not be discharged. Finally, the debtor may want to re-affirm the debt to protect a co-debtor from having to pay the debt.
On the other hand, it may not be economically practical to reaffirm the loan that is significantly underwater. It may be a better option to surrender the property and get a new loan after bankruptcy. Debtors with regular set income, such as social security, pension, annuity, disability, may even be able to get financing for a new car while still going through Chapter 7.
Can you keep collateral without reaffirmation?
Generally, the debtor cannot keep the secured property (collateral) by staying current on the underlying debt unless the debtor either redeems it or reaffirms the debt. However, reaffirmation agreements must be approved by the court. If the court finds that the reaffirmation is not in the best interest of the debtor, the court will not approve it. Usually, this happens when the debtor cannot afford it, such as when the debtor’s monthly expenses exceed the monthly income. If the court denies motion to approve reaffirmation agreement, the debtor may keep the property subject to the creditor’s lien. Most lenders have been allowing debtors to keep their property even in the absence of a reaffirmation agreement as long as the debtors continue to make regular payments. Once the debtor pays off the debt, the lender will release the lien from the property.
Does bankruptcy discharge liens on non-reaffirmed debts?
Bankruptcy discharges debtor’s personal liability on the debt, but not the liens. To understand this distinction, you need to understand how secured debts are created. Secured debts are debts secured by property, such as mortgages or car loans. Secured debts are created by a document that creates a security interest. A security interest is an interest in property that secures payment or performance of an obligation. In other words, a security interest is a lien on the property that guarantees the loan.
So, there are two components to a secured debt: (1) an obligation to pay the debt and (2) a security interest in property to secure the debt. An obligation to pay a debt is created by a promissory note, which is a contract signed by a debtor promising to pay the debt according to the terms of the agreement. A security interest in personal property is created by a security agreement. A security interest in real estate is created by a mortgage.
Bankruptcy discharges the first component of the secured debt – the debtor’s personal obligation under the promissory note. However, bankruptcy does not discharge the second component of the secured debt, which is a security interest in the property created by a mortgage or a security agreement. The security interest in the property is the lien for the amount of the debt that survives bankruptcy. The lien allows the creditor to repossess or foreclose on the property to satisfy the lien from the proceeds of the sale of the property. Since the debtor’s personal obligation under the promissory note is discharged in bankruptcy, the creditor cannot collect from the debtor’s personal assets. The creditor’s recovery options are limited only to the property that secured the debt.
Can I refinance the debt that was not reaffirmed in bankruptcy?
Generally, debts that have not been reaffirmed in bankruptcy cannot be refinanced because they have been discharged. In other words, they no longer exist. If the However, liens.
What is redemption in bankruptcy?
Redemption is a process that allows the debtor to retain collateral that is subject to a lien by paying the creditor its replacement value (market value) in one lump sum payment and discharging the balance of the loan in bankruptcy. Redemption is a great option for secured loans that are significantly underwater, i.e., the debtor owes more than the value property securing the debt, such as mortgages or car loans, although it is typically used for car loans. For example, if the debtor owes $10,000 on a car loan but the car is worth only $6,000, the debtor can redeem and keep the car free and clear by paying its value of $6,000 and discharging the balance of the loan of $4,000 in bankruptcy.
How to determine the value of property for redemption?
The key determination for redemption is the value of collateral. In bankruptcy, replacement value of the property as of the date of the bankruptcy filing is used to determine the redemption amount. The debtor can use an affidavit from an appraiser, or when the collateral is a car, the NADA retail or trade-in value of the vehicle, depending on the bankruptcy court where the case is filed. The Orlando division of the Middle District of Florida Bankruptcy Court allows redemption for the NADA trade-in value. The Tampa and Jacksonville divisions go by the retail value based on the condition of the vehicle. If a vehicle requires significant repairs, body or mechanical work, an appraisal may be beneficial to prove the value of the vehicle.
Can I finance the redemption amount?
There are some lenders that specialize in lending funds to debtors to do redemption, but those lenders generally require that the debtor is represented by an attorney. Although redemption loans typically have high interest rates, they still result in lower monthly payments than under the original loan and significant savings to the debtor over the terms of the loan due to the lower borrowing amount (principal).
How can we help?
We can help you determine if surrender, reaffirmation, or redemption is the best option for your case. Just because the options are available, they may not be feasible or practical. Both the reaffirmation and the redemption have significant legal consequences, as well as they involve additional attorney fees and/or costs requiring a cost/benefit analysis.
At Anna Handy Law Firm, P.A., we are acutely aware of the financial strain of our clients. We do not charge you for the initial phone consultation. We do not push you to file bankruptcy to get a retainer. We don’t push you to get unnecessary work done. We don’t judge – we find solutions. We give you honest advice about your options and rights, including the “doing nothing” approach. As such, we offer very affordable bankruptcy fees. We make our fees competitive and in certain cases, we offer payment plans to address each case individually as each case has a different set of circumstances.
If you are overburdened by your debts, being sued or harassed by creditors, or subject to wage garnishment, do not hesitate to call us now for a free initial phone consultation. The attorney’s direct business cell phone number is (386) 248-3000. You may also email us at [email protected].