Reaffirmation agreements for mortgages in bankruptcy

Here at Shenwick & Associates, we're devoted to helping our clients discharge as many of their debts as possible in bankruptcy. We also aggressively attempt to help our clients retain as much of their property as possible after their bankruptcy case is concluded.

However, with regard to property that's secured by a debt, whether a debtor can retain that property will often depend on whether he or she is willing to sign a reaffirmation agreement. We covered reaffirmation agreements in a recent e-mail, but have recently done some more investigation into the topic, which we wanted to share with you.

As a hypothetical, let's say we have a married couple, filing jointly, who own a house with a mortgage and are current on their mortgage payments. There is no equity in the house. They want to keep their house after their bankruptcy case is concluded and continue to pay their mortgage during the pendency of the bankruptcy case. Does this couple need to file a reaffirmation agreement with the secured creditor? Our answer, for cases filed in the Second Circuit (New York, Connecticut and Vermont) is no.

Prior to the enactment of BAPCPA in 2005, courts in several circuits (including the 2nd Circuit in Capital Communications Federal Credit Union v. Boodrow (In re Boodrow) and BankBoston, N.A. v. Sokolowski (In re Sokolowski) had held that debtors had the option (the "ride through option") to retain both real property and personal property collateral and maintain current performance on the loan. Furthermore, secured creditors could not foreclose based solely on the debtor's filing of a bankruptcy petition and failure to reaffirm.

When BAPCPA was enacted, 11 U.S.C. §§ 521(a)(6) (which governs the debtor's duties with respect to secured personal property) and 362(h) (which governs termination of the automatic stay with respect to secured personal property) specifically eliminated the ride through option for personal property. However, decisions in several circuits (including a decision from Connecticut, In re Caraballo) have held that Boodrow and Sokolowski remain binding authority that the ride through option is still in effect with respect to real property. Accordingly, in New York a mortgage on a house does not need to be reaffirmed, but a loan on secured personal property needs to be reaffirmed.

As with all of our opinions expressed in these e-mails, this is not legal advice–every bankruptcy case is different and we cannot render legal advice without being retained. To discuss your unique situation with respect to your personal and real property, reaffirmation of secured debts and whether bankruptcy is right for you, please contact Jim Shenwick.