Reaffirmation Under the New Bankruptcy Law - What You Need to Know

Whether or not to reaffirm a secured debt, under §521(2)(A) of the Bankruptcy Code, used to be a no-brainer. Because the act of reaffirmation did far more for the creditor than it did for the debtor, the advice most commonly - and properly - given by bankruptcy attorneys to their clients was as follows: If you want to keep the property securing the debt (most commonly the debtor's house or car), select the option known as 'retain and pay'. The creditors' urgings for reaffirmation could generally be ignored without serious consequences.

But all that changed under the BAPCPA, effective October, 2005. As of this writing, the majority of districts having ruled on the issue do not, under the new bankruptcy law, recognize the 'retain-and-pay' option. That is, if a debtor attempts to proceed under that option, there is a very good chance that the creditor may file an adversarial action challenging the debtor's option.

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Upon filing a Chapter 7 bankruptcy petition, a debtor must, within 30 days of that initial filing date, file a 'statement of intention' with respect to any debts secured by assets of the bankruptcy estate. The debtor then has, under §521(2)(B), 30 days from the first date set for the §341 creditors' meeting to "perform his intention" (e.g. file a reaffirmation agreement) with respect to the secured property. With respect to that statement of intention, the options are as follows:
Surrender
The easiest option for the debtor is simply to surrender the asset to the secured creditor. For example, the debtor's vehicle may be worth less than the amount owed to the lender. If the debtor is finding the monthly payment to be onerous, it may make sense for him to simply allow the creditor to retake possession of the vehicle. After the creditor sells the car at auction there is typically a deficiency, which debt is simply discharged along with the rest of the debtor's unsecured debts.
Redemption
An option rarely exercised by debtors is to redeem the asset from the creditor by purchasing the asset for the fair market value, with the balance of the debt balance to be discharged. Because the debtor is required to pay the redemption amount in a lump sum payment, this option is rarely used in the case of vehicles, and is generally used only in connection with consumer goods, such as household appliances purchased using a purchase money security interest (PMSI).
Reaffirmation
The option most commonly used with regard to the debt (i.e. mortgage) secured by a debtor's home. Because reaffirmation requires the debtor to forgo the discharge to which they otherwise would have been entitled, reaffirmations were rightly disfavored prior to the 2005 passage of the BAPCPA. That is, if the debtor later (i.e. after the bankruptcy case is closed) defaults the creditor is entitled to exercise any and all rights available under state law as if the bankruptcy had not taken place. In other words, the debtor would be liable for any deficiency after Sheriff's sale.
Retain and Pay
In situations where the debtor desired to keep the property, but did not want to risk being "on the hook", as with reaffirmation, in the event things would turn south for him after the bankruptcy, this is the option that made the most sense. But as explained above, this option has been lost in most districts as of October, 2005. Careful discussion with an experienced bankruptcy attorney is therefore vital to determine if this option is still available in the debtor's district, and if not, which of the other three options is best under the debtor's particular circumstances. The option selected by the debtor has critically important consequences for him.
Reaffirmation Under the New Bankruptcy Law - What You Need to Know

David Romito is a Pittsburgh based Bankruptcy Attorney. He assists clients with debt relief problems across Western Pennsylvania. For more answers to your bankruptcy questions, please visit his site at Pittsburgh Bankruptcy Attorney