The Bankruptcy Code provides a debtor in a Chapter 7 case three options for dealing with secured debt:
- give the property back and owe nothing;
- keep the property and reaffirm the debt; or
- redeem the property by paying the creditor, in cash, the full market value of the property.
If you want to keep property that is secured by a properly perfected security interest in a Chapter 7 bankruptcy case, you may be required to sign a “reaffirmation agreement.” A reaffirmation agreement is a contract which waives the bankruptcy discharge with respect to a particular debt. If you sign a reaffirmation agreement you must continue making the contract payments and will remain personally liable on the reaffirmed debt if you fail to pay. The reaffirmed debt will be completely unaffected by the bankruptcy filing, and will survive the bankruptcy discharge, as if the bankruptcy had never been filed.
Unsecured creditors may ask you to reaffirm all or a portion of an unsecured debt in exchange for a promise to extend additional post bankruptcy credit. The unsecured creditor will argue that the additional credit will help you to reestablish a positive post bankruptcy credit history and minimize the adverse impact of the bankruptcy on your credit report. It is almost never a good idea for a debtor to reaffirm a completely unsecured debt. There are numerous sources for obtaining post petition credit and you can reestablish a positive post bankruptcy credit history without agreeing to pay any portion of the prior debt.
Rescission of Reaffirmation Agreements
The Bankruptcy Code permits you to rescind a reaffirmation agreement at any time prior to the date the Bankruptcy Court issues a discharge order, or within 60 days after the reaffirmation agreement is filed with the court, whichever event occurs later. In other words, if you change your mind after signing a reaffirmation agreement you have until the later of the date the court issues a discharge order, or 60 days after the reaffirmation agreement is filed with the court to rescind the agreement.
The Bankruptcy Code states that a reaffirmation agreement can be rescinded merely by “giving notice of rescission” to the creditor. Written notice is not legally required; oral notice is sufficient. However, you will find it virtually impossible to prove that you verbally gave notice of rescission. Therefore, as a practical matter, to properly rescind a reaffirmation agreement, you should always file a Notice of Rescission with the Court and serve the creditor with a copy of the Notice.
Redemption of Personal Property
Redemption permits a debtor to obtain ownership of collateral for a loan by paying its market value instead of the contract price. The redemption procedure permits a debtor to avoid paying the full contract amount for property that has depreciated in value.
An informal redemption occurs if the debtor and creditor reach an agreement concerning the value of the collateral and payment terms. Most department stores will negotiate with debtors concerning the amount and terms of payment, including the interest rate and amount of any monthly payments. An “informal” redemption is informal because the debtor and creditor negotiate the deal between themselves. The bankruptcy court stays out of the process. All price and payment terms can be negotiated in an informal redemption.
Most redemption agreements are informal because both the debtor and creditor have an incentive to compromise. The debtor will usually want to keep the property if he can pay a reasonable price on fair terms. The creditor will gain little or nothing by taking the property. It is difficult for most creditors to profit from selling used consumer goods in a retail store. The repossession, storage and sale costs make it economically unwise for creditors to play hard ball in negotiating redemption of consumer goods.
A “formal” redemption is a bankruptcy court procedure permitting the debtor to redeem the collateral. To start the procedure, the debtor’s attorney must file a written motion requesting the court to authorize the redemption. The court will determine the property value and enter an order requiring the creditor to deliver the property (and legal title) to the debtor when the debtor pays the money.
A formal redemption is useful only if the debtor and creditor can not agree on the property value. Most creditors understand (or should understand) that if the debtor and creditor agree on the property value, it is pointless to force a debtor through a formal redemption process because the right to redeem is automatic. The only real function of the court in a formal redemption is to establish the fair market value of the property and force the creditor to complete the transfer.
The formal redemption procedure may only be used to redeem personal property used primarily for personal, family or household use. The property can not be primarily used for business purposes. The property must be exempt from seizure under applicable federal or state law. Formal redemption also requires the debtor to pay the full amount in cash. The court may not allow the debtor to pay the redemption amount in installments. Most debtors do not have the funds available to pay for the property in cash.