Should I Reaffirm Any of My Debts in Bankruptcy in New York?

The Bankruptcy Code provides for a procedure known as reaffirmation of debts.  This is a way for a debtor in bankruptcy to promise all over again to pay the debt that would have been discharged in bankruptcy.  It may seem that it would make no sense to reaffirm a debt that would otherwise have been discharged in bankruptcy, and in most cases, it truly does make no sense.

When you file for bankruptcy you will receive a discharge of all of your debts, which means that the creditor may not seek to have you pay the debt ever again.  This includes secured debts, such as mortgages and car loans.  If a debt is secured it means that if you do not pay, the creditor has the right to take back the property which secures the debt.  In other words, if you do not pay your mortgage note, the bank can foreclose on the mortgage and take your house.  If you do not pay your car loan, the lender can pick up your car.  In each case you have made two promises.  One was on a note, the promise to pay the money.  The other was on a secured instrument, which is that if you do not pay the note, they can take away the house or car.

In a bankruptcy, you receive a discharge on the note, but the secured instrument is still in force.  While the creditor cannot take any action during the bankruptcy, once the bankruptcy is over, if you are behind in your payments, the secured creditor can foreclose on the mortgage or seize the car.  Unless you have reaffirmed the debt, if there is a deficiency after the car is repossessed or the house is foreclosed, the creditor cannot ask you to pay the deficiency after they have seized the car because you received a discharge on the note.  The reason the creditors want you to reaffirm debts is that they want the added ability to come after you personally for deficiencies even though you filed for bankruptcy in the event you are unable to pay the mortgage or car loan after the bankruptcy.

Do I Have to Reaffirm My Debts?

Because of the way the Bankruptcy Code sections dealing with reaffirmation were written, it is unclear whether you have to reaffirm a secured debt in order to keep either your house or your car.  There have been many cases around the country where creditors have tried to force debtors to reaffirm debts and the results have not always been consistent.  It seems that auto creditors do have the right to seize your car if you do not reaffirm the debt even if you are up to date on the payments.  It is less clear whether mortgage lenders have the right to foreclose on a house if you do not reaffirm.  What you need to know is what the actual day to day practice is here in New York as to reaffirmation of debts.

Here in New York, most bankruptcy attorneys seldom, if ever, recommend that their clients reaffirm debts.  This is because, with very few exceptions, creditors do not attempt to seize cars or foreclose on houses when the debt is not reaffirmed.  The only current exception that is known is Ford Motor Credit (and Mazda, which is part of Ford Credit), which will pick up cars when the note is not reaffirmed even if the payments are up to date.  Why they do this is a mystery, as they end up selling the car at auction and often get a lot less for it than they would have gotten from the debtor who kept making payments.

As of this writing, no one else lending money for cars will pick cars up if the loan is current.  If the loan is in arrears, or falls into arrears after the bankruptcy, they, like any lender, will pick the car up.  And it may be that they will pick it up after one miss where they may have waited for two or three misses, but if you stay current you should have not problem.

As for mortgages, there does not seem to be any banks that foreclose because the debtor does not reaffirm the debt.  There was one case in New York where a bank tried to foreclose because the debtor did not reaffirm, but the courts said they could not do it.  Although Congress did make some changes to the law after that, there have been no attempts to foreclose for failure to reaffirm in the past several years.

It is important to note that other auto loan companies or banks could change their practice and start picking cars up if there is no reaffirmation, but at this point we do not recommend reaffirmation.  It is almost always not necessary, and can lead to financial problems in the future.  Bankruptcy is supposed to give you a fresh start, and avoiding reaffirmations is one way to help achieve that goal.

 Allan Bloomfield practices bankruptcy law in Forest Hills, Queens. Contact Allan today for a free consultation.

About Allan Bloomfield

For over 30 years, my focus in practicing law has been to help people overcome what seems to them to be insurmountable financial difficulties. I have helped thousands of people file both Chapter 7 and Chapter 13 cases, and in most cases, they are able to keep all of their assets, including homes, cars, their retirement accounts and personal property.