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Vermont Bankruptcy Services

Law Office James Palmisano
417 Barre Street
Montpelier, Vermont 05602
Phone: (800) 585-3169
Phone: (802) 229-4001
Fax: (802) 229-2733

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.:Reaffirmation Agreements and "Ride Through Option":.

You can voluntarily choose to pay any debt that would otherwise be discharged in your bankruptcy case by filing a "Reaffirmation Agreement" with the bankruptcy court. Reaffirmation Agreements are typically used only in Chapter 7 cases. The agreement is signed by both you and the creditor and usually must be approved by the Bankruptcy Court. This means you may have to attend another court hearing where the judge will consider the Reaffirmation Agreement and determine whether you have enough income to pay the reaffirmed debt. If the judge approves the agreement, then you will continue to be liable for the debt even after your bankruptcy case is over. If the judge does not approve it, then the agreement will not be enforceable.

Reaffirmation Agreements are frequently requested by secured creditors; that is, creditors with whom you have a mortgage loan, car loan, or some debt secured by property you own. Property that secures a debt is called "collateral". Secured creditors primarily want you to sign a Reaffirmation Agreement so that if you default on their loan after bankruptcy, they can not only repossess the collateral and sell it, but also collect any deficiency from you if they sell the collateral for less than the amount you owed on their loan. If you do not reaffirm a debt, the creditor is precluded from collecting a deficiency from you in the event you default on their loan after filing bankruptcy.

The "Ride Through Option". Many bankruptcy attorneys agree that as long as you remain current on your payments, you will be able to keep any property subject to a loan even if you do not sign a Reaffirmation Agreement. This is the so-called "ride through option". Before the bankruptcy laws changed in 2005, this option was clearly available in Vermont to all bankruptcy debtors. Many creditors are still allowing debtors to invoke the "ride through" option even though they may have a right to insist on a reaffirmation agreement under the 2005 bankruptcy law.

It seems clear even after the 2005 bankruptcy law changes you are not required to sign a reaffirmation agreement for real property, such as your home. The jurisprudence on this issue, particularly in the Second Circuit Court System and the bankruptcy courts within the Second Circuit indicate that a debtor has the "ride through option" to retain real property and the secured creditor may not foreclose based solely on the debtor's filing of bankruptcy and failure to reaffirm. In re Caraballo, Case No. 07-32469 (D. Conn. 2008)

Once your bankruptcy case is over if you default on a secured loan, the creditor will be able to repossess the collateral and sell it. Of course, this is true whether or not you signed and filed a reaffirmation agreement. However if you did sign a reaffirmation agreement, the creditor will also be able to collect a deficiency from you in the event the collateral is sold for less than the balance owed on the loan.

In sum, because of the added process and difficulty of getting a reaffirmation agreement approved by the court, and because of the potential liability in the event of a future default, it is usually advisable to avoid signing a reaffirmation agreement. Occasionally, however, a creditor may offer a reaffirmation agreement with terms that reduce the underlying loan balance, lower the interest rate, or extend the loan term to try to entice a debtor to sign a reaffirmation agreement. In some cases the benefit of these more favorable terms may outweigh the negative legal effect and consequences of reaffirming a debt. You may also decide it is worth reaffirming a debt in order to preserve a positive relationship with a particular creditor.

Creditors Must Continue Sending Monthly Statements. In the past some creditors threatened to stop sending monthly statements if you did not agree to reaffirm their debt. All secured creditors are now required by Vermont Bankruptcy Court Rule to continue sending monthly statements to both Chapter 7 and Chapter 13 debtors who indicate an intention to retain the collateral. Thus, in Vermont it is clear creditors must continue sending you statements whether or not you agree to sign a reaffirmation agreement. Vt. Local Rule 3071-1.


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