What to Do? Reaffirm? Surrender? Redeem?
Reaffirmation, Surrender or Redemption?
One of the decisions that a Chapter 7 debtor must make when filing a bankruptcy case is what to do with property securing a debt. Debtors living in the area covered by the Eleventh Circuit Court of Appeals have one of three options. A Debtor’s options are:
Reaffirm the debt owed to the creditor;
Surrender the collateral securing the debt owed to the secured creditor; or
Redeem the secured collateral for its value on the day of the filing of the bankruptcy case.
Reaffirming a Secured Debt
A reaffirmation agreement is a written document setting out the terms under which a debtor will repay a secured debt after the filing of the bankruptcy case. The reaffirmation agreement must be signed by the creditor and the debtor. The Bankruptcy Code also requires that the agreement be signed by the Debtor’s attorney with a certification that continuing to pay the debt will not create an undue hardship on the debtor or the debtor’s dependents. The reaffirmation agreement must be filed prior to the entry of the debtor’s discharge.
Surrendering Collateral to a Secured Creditor
Liens, unless avoided, pass through bankruptcy as if a case had never been filed. When a debtor decides to surrender secured property, the creditor has the right to recover the property. However, the debtor has no further obligation to make payments. When the discharge is entered, the debtor’s liability becomes non-recourse. Non-recourse means that the creditor can only recover the collateral and sell it to pay the debt. If the property is worth less than the debt, the creditor cannot pursue the debtor for any shortfall. If the property is sold for more than the debtor owes, the debtor or the Trustee is entitled to any money over that required to pay the debt.
Redeeming Secured Property
The final option available to a debtor is to redeem the property. To redeem secured property, the debtor must file a motion and pay cash equal to the value of the property on the day of the filing of the bankruptcy case.
What happens if I just keep paying and don’t reaffirm? No Reaffirmation, Surrender or Redemption!
Notwithstanding the 11th circuit’s ruling, many mortgage companies, but not all, take the position that as long as you remain current on your payments they will not seek to foreclose after your chapter 7 bankruptcy case. The problem with this approach is that the mortgage company no longer reports to the credit bureau regarding your timely payments. When your timely payment history is not reported, it makes it difficult for you to rebuild your credit score. If you do reaffirm a debt in your chapter 7 bankruptcy case, you need to make sure that your lender will continue to report your payment history. The reporting of your timely payments will allow your credit score to rise post filing.