The Code Dictates
The bankruptcy code is what governs every issue of a bankruptcy filing. Under chapter 7 bankruptcy law, the bankruptcy code dictates as to what must be done with regard to particular, secured property. For example, if you have a financed vehicle in a chapter 7 bankruptcy case, the bankruptcy code mandates that you make an election. You can either reaffirm the debt on that vehicle, redeem the debt on that vehicle or surrender the vehicle in satisfaction of the debt. You simply only have those three choices with regard to a secured vehicle debt in a chapter 7 bankruptcy case. You no longer have the ability to simply continue to make monthly payments without a valid reaffirmation agreement on file. Before the law was changed in 2005, you did have the ability to simply continue to make regularly scheduled vehicle payments without reaffirming. This was known as the ride-through. However, once the law was changed, the ride-through was eliminated from the options one can take in a chapter 7 bankruptcy case with regard to a financed vehicle.
Option With A Home
With regard to your house, the bankruptcy code specifically excludes the requirement to reaffirm such a debt. Thus, the legislature knew very well what they were doing. They intended that real estate mortgages would not have to be reaffirmed. You basically have the opportunity to continue to make monthly payments on an ongoing basis to keep your house. Provided you are up-to-date on your payments and you do not have any arrearage, the mortgage company is prohibited from foreclosing on the property even though you may not have reaffirmed on that debt. Many mortgage lenders will send out a proposed reaffirmation agreement in an attempt to get the debtor to go back on the hook for the debt. A savvy bankruptcy attorney will advise his client that reaffirming on the mortgage is not only unnecessary but it may constitute malpractice. This is due to the fact that if someone reaffirms on a mortgage, and then falls behind on the debt, the mortgage company can foreclose and sue for the deficiency. Under the other arrangement, where the homeowner is simply making voluntary payments, and then loses the house, the mortgage company can only foreclose on the property and cannot seek a deficiency against the homeowner.
As you can see, there is quite a difference between mortgage debt and vehicle debt with regard to what the debtor must do under those circumstances. Secured vehicle debt must be either reaffirmed, redeemed or surrendered in a Chapter 7 bankruptcy case. A mortgage debt does not have to be reaffirmed. In fact, I will not allow my clients to reaffirm on a mortgage debt because I feel it is malpractice.
