Chapter 7 debtors have several options for their personal property (anything other than land or buildings) that is financed and thus subject to a mortgage lien:
Surrender. You can surrender (turn in) the property to the lender and discharge the debt. This often makes good sense where a car is underwater (worth less than what’s owed) or is unaffordable.
Reaffirmation. “Reaffirmation” means that a debtor in a bankruptcy case waives the discharge of a specific debt. Reaffirmation allows a debtor to retain property that is financed and subject to a mortgage lien and continue making payments. Reaffirmation is required for personal property (anything other than land or buildings) that the debtor wishes to retain and pay for in installments. In particular, note that if your vehicle is financed, and you do not reaffirm the debt or redeem the vehicle after filing a Chapter 7 bankruptcy case, then the creditor is free to repossess the vehicle.
Reaffirmation is not required for real property (land or buildings). A debtor can retain real property so long as the debtor continues the required payments. However, some creditors secured by real property will refuse to send statements or advise of increases in interest, insurance escrow payments, and tax escrow payments; further, absent a reaffirmation agreement, some mortgage companies may stop reporting to the credit bureaus timely payments. This is why you must keep proof of cancelled checks, debits from bank accounts, etc. to show that timely payments were received by the mortgage company. As a general rule, Mitchell & Culp, PLLC discourages reaffirmation unless the property has a good deal of equity (value in excess of what is owed). Among the reasons for this:
- many debtors reaffirm believing that they can make the payments, only to later learn that they cannot. A foreclosure, repossession or other collection activity after reaffirmation may mean that the debtor who has been discharged from his or her debts will end with a large deficiency debt. Thus, the reason for filing – discharge of debt – has only partially been successful. This is particularly troublesome in the reaffirmation of automobile debt.
- some creditors will promise to “remove the bankruptcy” or default notation from your credit report upon reaffirmation. This promise may be meaningless. First, a Chapter 7 bankruptcy will appear on your credit report for a period of ten years. Second, the promise may not be true. If this promise is important to you, then please consider obtaining a written promise from the creditor to remove the notation, and obtaining this written promise prior entering into a reaffirmation agreement. Mitchell & Culp, PLLC urges you to carefully consider reaffirmation. In the case of an automobile, do everything possible to arrange for alternate transportation. Remember that financing for the purchase of an automobile is generally available upon entry of a discharge order; if you desire to obtain financing while your Chapter 7 case is open, there are lenders who offer such financing. As to homes, many mortgage companies will continue to send monthly statements after the bankruptcy filing. If you reaffirm a debt, the lien will remain on the financed property, as if you’d never filed.
Redemption. An alternative to reaffirming the debt secured by personal property is to redeem the property. Redemption allows you to buy the personal property outright, for one lump sum, at its current value. This may make sense for you if
- you can come up with the cash needed to buy the property at its fair market value at the time of the bankruptcy filing and
- the amount owed on the loan is more than the current value of the property securing the loan.
Pay off the debt. Finally, if you have the ability to come up with the cash needed to pay off the entire debt as of the date of the bankruptcy filing, and the amount owed is less than the current value of the property, you may wish to pay off the debt.