When clients come to see us about bankruptcy, they routinely ask us if they are going to lose their home or vehicle. The short answer to this question is no. You can reaffirm the debt through your bankruptcy. This can be done as long as you are current on your loan payments, the property is insured and you can afford to make the monthly payments.
When a debtor files for bankruptcy, he or she must file a Statement of Intentions. This statement lets everyone know your intentions regarding secured debts. With respect to these types of secured debts, a debtor has three options: surrender, reaffirmation or redemption.
A debtor can always surrender the property to the creditor in their bankruptcy and wipe out any money owed. Many debtors decide that they simply cannot afford to keep their home or vehicle. Job losses, layoffs, disability and divorce are common reasons why a debtor decides to surrender the home. A debtor can also be trapped in a bad mortgage such as one at a high interest rate or one with an adjustable rate. A debtor may have been unsuccessful in obtaining a loan modification that helped or the debtor was denied a modification. Many debtors have negative equity in their homes which means that the homes are worth less than what is owed on them. Nationwide about 25% of homes are underwater. In these circumstances, a debtor cannot sell the home since the mortgage(s) cannot be paid in full at closing. Short sales are rarely beneficial to a debtor because under Maine law the creditor can come after you for the difference. Surrender allows a debtor to walk away from the home or vehicle and discharge any balance owed (the "deficiency").
When do I have to leave my home?
With respect to home mortgages, you can stay in the home while a foreclosure is pending. It takes a creditor about 6 months to complete a foreclosure case in Maine. The earliest possible date that a creditor can get you out of a home under Maine law is 90 days after a judge signs a judgment of foreclosure.
To reaffirm the debt, a debtor must sign an agreement that states that bankruptcy does not affect the underlying loan. In other words, if you reaffirm a debt, you still owe the money. The good news is you get to keep your home or vehicle. The bad news is that if you default on the loan in the future, the creditor can take the property from you and sell it at auction. If the creditor does not recover the full amount of the loan and the property is located in Maine, you will still owe the difference. Before you reaffirm a debt, you should make sure that you can make all monthly loan payments.
As stated above, a debtor files a statement of intentions which lets secured creditors know if a debtor wants to reaffirm a debt. The creditor then prepares a reaffirmation agreement which must comply with an officially approved form. The agreement gets sent to the attorney for the debtor who then will review it with you. If everything is in order, you will sign it. Your attorney must sign a certification that: (1) this agreement represents a fully informed and voluntary agreement by the debtor; (2) this agreement does not impose an undue hardship on the debtor or any dependent of the debtor; and (3) the attorney has fully advised the debtor of the legal effect and consequences of this agreement and any default under this agreement. The agreement then gets filed with the Court. If you are not represented by an attorney or if the attorney declines to sign the agreement, the Court will hold a hearing and determine if the agreement is in your best interest. On the issue of undue hardship, you must establish that you can afford to keep the home or vehicle. In other words, your monthly income after subtracting out monthly expenses leaves enough to make the mortgage payment.
What if I change my mind?
You may rescind (cancel) your reaffirmation agreement at any time before the bankruptcy court enters a discharge order, or before the expiration of the 60-day period that begins on the date your reaffirmation agreement is filed with the court, whichever occurs later. To rescind (cancel) your reaffirmation agreement, you must notify the creditor that your reaffirmation agreement is rescinded (or canceled).
What if the creditor stops sending me monthly statements?
Some secured creditors will stop sending you monthly statements after you file for bankruptcy. This may occur even if you intend to reaffirm the debt. The creditor may also stop any automatic payments. If this happens to you, you will still need to send in your monthly payments.
What if I do not receive a reaffirmation agreement and I want to keep my home?
Not all secured creditors require reaffirmation agreements. If you do not receive one from us and you want to keep the property, you should continue to make your monthly payments. The creditor may stop sending you monthly bills or may report to the credit bureaus that the debt has been discharged in bankruptcy. Remember, all a reaffirmation agreement really does is to allow a creditor to come after you for a deficiency in the event of a future default. If a creditor does not require a reaffirmation agreement, you have the best of both worlds – You get to keep the property as long as you can make the monthly payments.
Debtors are allowed to redeem the property subject to a mortgage or security interest. To redeem means to pay the creditor the fair market value of the property in exchange for a release of the lien. For example, a debtor has a car loan in the amount of $10,000.00 and the vehicle is worth only 5,000.00. In this case, a debtor can pay the creditor only $5,000.00 and own the vehicle. The downside of redemption is that the debtor has to come up with the full amount of the value and pay it to the creditor as a lump sum. In our example, $5,000.00. There are, however, companies that specialize in redemption loans to assist debtors in coming up with the funds to redeem property.
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Contact us at, contact us by e-mail or call us at 207-942-4697 (toll free at 877-900-9857) to set up a free consultation. This article is not meant to be a substitute for legal advice from an attorney as every person’s situation is unique. It is important that you hire an attorney to help you avoid the many pitfalls that can occur in a bankruptcy.