Reaffirmation, Redemption and Ride-throughs

Every bankruptcy will likely deal with a “Reaffirmation” or a “Redemption” of property. Therefore, we thought we better explain what both of them are so you can best make a decision about them when they come up. The “Ride-Through” exists in the absence of either and will need to be explained too.

In bankruptcy, debtors have the privilege of reaffirming a debt. This means you basically sign a new loan agreement with the original creditor and the loan will not be discharged as part of the bankruptcy. You will still owe for this debt after bankruptcy. It also means you get to keep the property that the loan is linked to.

Rarely, if ever, should you reaffirm a debt not secured by a lien to property. Meaning, if you do not reaffirm a debt, the creditor will have the right to take away some of your property but cannot hold you personally liable. If a creditor cannot come and take away property if you do not pay a debt, you should not reaffirm the debt. Even if you wanted to, your attorney should not sign off on the reaffirmation agreement which would require you to go before a bankruptcy judge, and it is not likely the judge will sign off on the reaffirmation. So do not even try to reaffirm on unsecured debt.

Now, we get to the part where the right of the creditor to come take away property if you do not pay. This is typically with a car or home in a Chapter 7 bankruptcy. In Chapter 13, it can extend to more “toys” you might own like extra cars, boats, 4-wheelers, and the like.

Reaffirmation or reaffirming a debt means you will keep the property to which the debt is attached, and the debt will remain owing even after the bankruptcy. Sometimes the language is used that the debt remains “alive”.

To reaffirm a debt you will sign a new agreement with the creditor and file the agreement with the court before your case is closed. For usual items, like the home or a car per debtor, the agreement is approved without any issues. Other items like the “toys” often require a hearing where the agreement is formally approved by a judge. Proof has to be provided that you can afford this debt after the bankruptcy is completed. Once approved, the debt will remain alive even after your bankruptcy is completed and you may be sued on it later. Be aware that if you decide to back out of a reaffirmation, contact your attorney immediately; only a limited window exists to back out.

Reaffirmation agreements are typically very similar to the original loan you had with the creditor. Most of the ones I have worked with in the past were exact matches of the original loan with the same payments for the same time frame with the same interest. This also means you will pay the full value of the loan that you originally owed. Nothing will change on your credit report either regarding this debt.

Now, let’s talk about redemption. This is one of the ingenious parts of the bankruptcy code. This is pretty much what it sounds like, we redeem your property from the debt in which it is held bound. This only applies to debts that will remain attached to property through the bowels of bankruptcy. Put it this way, you have a $15,000 loan on a vehicle worth $9,000. Reaffirming means you would pay the entire $15,000. Redeeming the vehicle, or redemption, means we get a loan for probably close to $10,000, pay the first creditor their $9,000 (fair market value), and you walk away only owing $10,000 instead of $15,000. That $5,000 difference is discharged along with your other debts in the bankruptcy.

A basically same idea occurs in Chapter 13, except you keep the same creditor but we “strip” the lien back to the value of the vehicle. As you can probably tell, this is called “lien stripping”. Therefore, redemptions only occur in Chapter 7 cases but the same idea still occurs in Chapter 13.

Redemption agreements also must be filed with the court, but in a slightly different manner. The court will approve them typically. The only real problems is finding a creditor who will give you a loan to do a redemption. Then the opposing party will usually raise some sort of a concern about what the fair market value is of the item to be redeemed (that creditor wants to milk the court for as high a fair market value as possible so they get as much money as possible). Otherwise, you walk out owing less than you did before and you get to keep the property.

Now we will talk about the other R of the trilogy. What happens to a debt secured by property if you do not do a reaffirmation or redemption? Well, that is the ride-through. There are some pitfalls and concerns you should probably be aware of in relation to it.

Many times a bankruptcy will close without a reaffirmation or redemption agreement entered by the debtors. The more inexperienced creditors, especially the little car sales shops, will not usually seek a reaffirmation (but a good attorney will still look at redemption options). Homes also seem to commonly ride out the bankruptcy process without a reaffirmation or redemption. These “ride-through’s” might look to be in your favor, but be aware of some serious pitfalls.

On the plus side, these debts can never sue you if you default on their debt and there is a deficiency. You can walk away from that car or that home at any time and that creditor cannot come after you for the bankruptcy. This is a definite perk for keeping your options open in an unpredictable future. Beware, on the negative side is the flip of the positive, a car creditor can also come and get the car at any time. Since you did not reaffirm the debt, they too can come and retrieve the car at any time. Sure, a year or two down the road you might have a claim for unjust enrichment, or something else, but beware.

Now a house is a bit different for ride-through. If you keep paying your mortgage payment, it is hard for the mortgage company to just come and take your property away in the future. After all, you have other property in the home, and there are state laws against taking a home without proper legal proceedings. The coming to claim a car sitting in your driveway is entirely a different matter. A creditor can come reclaim the car in the middle of the night and you might never even know they were there.

Ride-through has some inherent risks that you will want to evaluate. Make sure you are getting what you want. After all, bankruptcy gives you the opportunity to make some demands. Creditors will also have theirs.

For more information on how reaffirmation, redemption, and ride-through will affect your bankruptcy in Idaho, contact us. If you already have an attorney, or have filed bankruptcy, visit with your attorney. We would be happy to help you plan your post-bankruptcy future with as few issues as possible.