12 Apr After I File Bankruptcy, Can I Keep My Stuff? Part Three
Bankruptcy operates to discharge your personal liability for debt (with a few exceptions). Liens, such as home mortgages and the lien on your car, survive bankruptcy. In a Chapter 7 case, the trustee will determine whether your home, car, or other asset is worth more than your exemption and any liens. If there is enough value to make it worthwhile, the trustee will sell that asset and use the proceeds to pay your creditors. If the trustee determines that there is no equity, he will “abandon” the property, meaning that he will take no further action to liquidate the asset. Then, if you wish to keep the asset, you will need to determine how to deal with any liens.
There are several options your attorney may advise you to consider, including entering into a reaffirmation agreement on the debt, or simply continuing to make the regular payments on the collateral. The latter option is often referred to as the “pay and drive” or “ride-through,” because it has often been used to pay off a car after bankruptcy.
A reaffirmation agreement is an agreement between the debtor in a Chapter 7 case and a creditor, entered into after the bankruptcy is filed, which “reaffirms” the obligation of the debtor to pay the debt. In other words, the reaffirmation takes the debt outside the operation of the bankruptcy discharge. If a debt is reaffirmed, the debtor is responsible for paying the debt, no matter what happens to the collateral. If a default in payments occurs, the creditor will have the ability to take the collateral, and if the collateral is not worth enough to pay the debt in full, to attempt to collect that difference from the debtor.
Reaffirmation agreements can only be signed after the bankruptcy is filed, and must be filed with the court in order to be binding. In addition, the debtor’s attorney has to sign off on the agreement, certifying that the agreement does not create a hardship for the debtor or the debtor’s dependents, i.e., that the debtor appears to have the ability to make the payments. If the debtor does not have an attorney, or if the debtor’s attorney is not willing to make that certification, the Bankruptcy Court must approve the agreement in order for it to be binding.
Reaffirmation agreements have been around for a long time, but because of the potential to interfere with a debtor’s fresh start, most attorneys who regularly represent debtors have tried to avoid them when possible. One of the strategies to do that is the “ride through,” which simply means that a debtor continues to make regular payments, during and after the bankruptcy filing. Prior to changes in the Bankruptcy Code in 2005, the fact that the debtor had filed bankruptcy did not constitute a “default” so as to justify foreclosure or repossession as long as all the payments were made on time. Of course, the “ride through” was not popular with institutional creditors, particularly those who regularly finance vehicles.
In enacting the Bankruptcy Abuse Prevention and Consumer Protection Act, Congress tried to eliminate the “ride through,” at least insofar as vehicle lenders are concerned. Those provisions are always of concern, but they don’t apply to every kind of collateral, and there may be other factors to consider. The provisions that attempt to eliminate the “ride through” don’t give the creditor the right to foreclose or repossess the collateral; at most, they allow the creditor to pursue state law remedies, and state law may not permit repossession or foreclosure in certain circumstances. These are issue that have to be considered on a case-by-case basis; the advice your attorney gives you with regard to your home mortgage, for example, may be different from what he advises you do about your car loan.
Creditors exert as much pressure as they can to coerce encourage debtors to reaffirm. And your inclination may be to agree–after all, you intend to make the payments anyway. Here’s why you should carefully consider whether to reaffirm. Let’s say, for example, that you reaffirm your car loan. A year later, through no fault of your own, your car is totaled. The insurance company says the value of the car is $9,000, but you owe $13,000. The insurance company pays the lienholder $9.000, who then looks to you to pay the difference of $4,000. You have no car, so you have to finance the purchase of a new car a year out of bankruptcy, and the best interest rate you can get is 15%. So, your monthly car payments are more than before, and you are trying to pay that $4,000 back as well. Sounds like the start of another slide into debt, doesn’t it? There may be circumstances where reaffirmation is appropriate, or where the risk of reaffirming is small. The value of the collateral, the details of your budget, as well as the terms of the loan you are considering reaffirming should all be considered. There may also be circumstances that make it unlikely that the lienholder will try to take any action as long as the payments are made. These are matters that experienced bankruptcy counsel can help you address.
It is also possible to reach an agreement with a creditor to modify the terms of a loan and reaffirm on more favorable terms. That depends on the creditor’s willingness to negotiate. You might think that any creditor, including the lender on your car, would rather have regular payments than collateral that is worth less than the debt. There are some that take just such a pragmatic approach. There are others, however, who will stand on their rights regardless of the consequences. Your attorney can help you decide how to deal with those creditors, and determine what is in your best interest. There is probably nothing in your bankruptcy that will affect your long-term ability to recover from financial distress than this issue, and the advice of experienced counsel is therefore invaluable.
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