December 4, 2015
Upon completion of a Chapter 7 bankruptcy proceeding a debtor receives a discharge of his/her debts. However, there is an exception to this rule.
A reaffirmation agreement is a post petition agreement between the individual Chapter 7 debtor and a creditor in which the debtor agrees to pay a pre-petition debt to the creditor in order to retain the property subject to the creditor’s security interest. By entering into a reaffirmation agreement, the debtor now gives up the right to have the debt discharged through bankruptcy. Therefore, counsel for debtors must carefully consider whether a reaffirmation agreement is appropriate in each situation and advise clients accordingly.
Courts around the country have reaffirmed the availability of the “ride-through” option for debts secured by real property when debtors are current on their payments. “Ride-through” still exists when debtors reside in the state in which ipso facto clauses are not enforceable. In this circumstance, the debtor may decline a reaffirmation agreement and simply acknowledge on the Statement of Intention that he or she will retain the collateral and pay in accordance with the agreement. If the applicable state law prohibits a creditor from repossessing the collateral solely on the grounds that the debtor has filed for bankruptcy, then the termination of the automatic stay in bankruptcy has no practical consequence. In other words, the debtor may retain his or her home as long as he or she makes the payments and at the same time obtains the benefit of the bankruptcy discharge for the underlying debt. The creditor still has recourse in state law such as repossession and foreclosure in the event of default for non-payment.
Therefore, in many cases it may be in the debtor’s best interest to avoid reaffirming the debt, continue to make timely payments and stay in the home. Because the debt has been discharged, the reaffirmation agreement has not been signed, the debtor can stop making payments in the future if the debtor’s finances change and ultimately give up the home without any obligation to pay the debt because the debt was discharged in the underlying bankruptcy proceeding.
Saving homes and reaffirmation agreements need to be analyzed carefully both before and after the filing of a Chapter 7 bankruptcy petition.