In “Bankruptcy Reaffirmation Agreements (Part One)” I explained that reaffirmation only applies to secured debt on personal property. I also explained that it only applies to Chapter 7 cases, not Chapter 13 cases. In this post, I’ll explain what reaffirmation agreements do and whether you must reaffirm a secured debt.
What Does a Reaffirmation Agreement Do?
If the reaffirmation agreement is approved by the bankruptcy court, the consequence is that you are still personally liable for the debt. So with your car loan, for example, you’d still be liable on the note. Remember, bankruptcy discharges liability. It does not affect security interests. As bankruptcy lawyers say, liens survive bankruptcy. The creditor can always repossess the vehicle if you fail to make payments—whether before or after bankruptcy.
However, if you sign a reaffirmation agreement, and it’s entered by the court, if you later fail to pay your car note, and GMAC repossesses the car, you’ll be liable for any deficiency. Now you see why the secured creditor wants you to reaffirm, right?
Do I Have to Reaffirm?
That’s the $10,000 question.
First, I’ll give you the technical answer: No. Officially, you do not have to reaffirm. No one can make you, and the Bankruptcy Code, as well as the reaffirmation agreement itself, will tell you that. Reaffirmation agreements are purely voluntary.
Then why would I reaffirm? And this is the real question. BAPCPA (our relatively new Bankruptcy Code) arguably gives debtors only three options with debts secured by personal property:
- Surrender—you essentially say, I don’t want it anymore, and you can come get it;
- Redeem—you pay the value of the collateral in a lump sum. (See my blog post on redemption); or
And What if I Don’t?
I’ll be up front with you and tell you there’s no good answer to this question. I’ll give you my opinion based on what I see here in South Carolina. After discussing this issue with clients, I usually have clients do a retain and pay. This is sometimes called ride through, which I like because, after all, we’re usually talking about cars.
Prior to BAPCPA the ride through a/k/a retain and pay was what debtors did here in South Carolina. This is because the ride through was allowed by decisions of the 4th Circuit Court of Appeals, which covers the states of Maryland, Virginia, West Virginia, North Carolina, and South Carolina. Then, in 2005, came our new Bankruptcy Code which made all this–and many other things–unclear.
Will that Work for Me?
Probably. Here’s what’s clear about not reaffirming: the Bankruptcy Code is clear that the automatic stay is lifted if you don’t reaffirm. That means the Bankruptcy Code is no longer prohibiting the creditor from taking whatever action the creditor could take under state law. So the automatic stay—the force field as I call it—is now up. But this really means nothing!
Huh, you say, I thought the automatic stay was important? It is, but you need to understand that the automatic stay doesn’t go on forever. It lifts when you get your discharge, which is the order stating you no longer owe your debts. In a typical case, you’ll get your discharge about 70 to 90 days after your bankruptcy hearing. If you don’t sign the reaffirmation agreement, the automatic stay lifts 30 days after your bankruptcy hearing, instead of 70 to 90 days after your hearing. In short, who cares? It eventually lifts anyway.
What’s really important here is the significance of not signing the reaffirmation agreement under state law–here, South Carolina law. In “Bankruptcy Reaffirmation Agreements (Part Three),” I’ll address what not signing the reaffirmation means under state law. Be aware that the answer to that question is different from state to state.