Should I Reaffirm a Debt?
Generally, if you want to keep property that is collateral (security) for a loan, such as your home or car, you must sign a reaffirmation agreement. The lenders are familiar with this process and it is usually routine.
A creditor is secured if it has collateral (a lien on your property) it can take (repossess or foreclose) if you fail to pay (or keep the collateral insured). The most common secured creditors are mortgage and auto lenders. Debts on store issued credit cards are sometimes secured by the goods purchased with the card. Most other creditors are unsecured.
Effect of Reaffirmation
If you sign a Reaffirmation Agreement, you agree to continue making your monthly payments (and you owe the reaffirmed debt) just as if you didn’t file bankruptcy. If you don’t sign a Reaffirmation Agreement, the debt is wiped out (unless an exception applies). The secured creditor retains its lien on its collateral regardless of whether or not you sign a Reaffirmation Agreement. So, if you sign a Reaffirmation Agreement, the creditor could seek to repossess the collateral and/or seek to collect money from you (if you fail to make your payments). If you don’t sign a Reaffirmation Agreement, the creditor can only repossess the collateral.
You can surrender the collateral and wipe out the debt. If you want to keep the collateral, you could sign a reaffirmation Agreement and continue to make your payments. Under certain circumstances you can make one lump sum payment to the creditor in the amount of the current fair market value of the collateral, keep the collateral and wipe out the debt.
Under the Bankruptcy Code, if you want to keep the collateral, you must sign a reaffirmation agreement. Despite this, some debtors keep the collateral, keep making the payments, but don’t sign a reaffirmation agreement. This is called “ride-through” or “keep and pay.”
Why “Keep and Pay?”
Because if you later miss payments, the creditor can only take the collateral. The creditor cannot seek money from you. Or if you later decide to give the collateral back, you won’t owe any money. Or you may not qualify for reaffirmation if, for example, you can’t afford the payments.
What are the Risks of “Keep and Pay” or “Ride-Through?”
If failure to reaffirm is a breach of your loan agreement, the creditor could seek to repossess even if you are current on your payments. You may not be eligible for a loan modification of your mortgage. Your credit report may not reflect that you are making the payments and that the loan is current. The creditor will normally stop sending you statements.
When Should I Consider “Keep and Pay” or “Ride-Through?”
You owe more than the collateral is worth. Your budget (Schedules I & J) show you can’t afford the payments. You’re not sure if you want to keep the collateral or not.
In Wisconsin a mortgage lender receives a shortened foreclosure process if it waives any deficiency (agrees to just take the house and not seek any money from you). 1st mortgage lenders commonly waive any deficiency. So even if you reaffirm a 1st mortgage, and the house later goes onto foreclosure, the lender may never seek money from you. 2nd Mortgage lenders almost never waive a deficiency. So if you reaffirm a 2nd mortgage and the house later goes into foreclosure, the 2nd mortgage lender will almost certainly seek money from you.
Reaffirmation Agreement Red Tape
To be valid, a Reaffirmation agreement must be signed by you, your lawyer and the creditor and filed with the court within 60 days of your 1st scheduled meeting of creditors. You have 60 days from the date the reaffirmation agreement is filed with the court, or the date of your discharge, whichever is later, to revoke the reaffirmation agreement. Revocation should be in writing, mailed to the creditor and filed with the Court.
This website does not create an attorney-client relationship. The information on this website does not constitute legal advice. You are urged to obtain the advice of an experienced bankruptcy attorney regarding your personal situation.