The general rule is that liens and leases pass through bankruptcy. Any property which you have which is subject to a consensual lien (such as the mortgage on your house, lien on your car, purchase money security interest you gave to Levin Furniture when you bought that new bedroom set) remains subject to that lien through and after your case. The same holds true for property subject to lease.

NOTE that non-consensual liens (other than those arising under a statute) and non-purchase money liens on household goods and tools of your trade may be avoidable to the extent they arose within 90 days of the bankruptcy filing or otherwise impair your exemptions. However, even avoidable liens will pass through bankruptcy unless expressly avoided during the course of your bankruptcy case. The discussion on this page is limited to liens which are not avoidable. For more information on the avoidance of certain kinds of liens, ask your attorney.

The affect of the lien and lease "pass through" for non-avoidable liens and leases is that unless you make your "peace" with the creditor holding the lien or the lessor, it can foreclose on its lien (i.e., repossess and sell the property subject to its lien) or, in the case of a lease, repossess the leased property, once the "automatic stay" is terminated or the case is closed.

In Chapter 13 you would typically make your "peace" by making provision for the secured creditor in the Chapter 13 Plan. In Chapter 7 you would typically make your "peace" by either redeeming the property or seeking to reaffirm the debt.

Redemption.

Redemption involves paying the creditor in one, up-front lump sum an amount equal to the current value of the property subject to its lien. Redemption makes sense, if you can afford it, if the value of the collateral is less than the debt. Note that a debtor may only redeem tangible personal property intended primarily for personal, family or household use from a lien securing a dischargeable consumer debt. If the parties cannot negotiate the redemption amount, an action can be filed with the Court asking it to value the property to be redeemed. The valuation standard (given the BAPCPA amendment to § 506(a)(2)) is the "retail" replacement price (given the age and condition of the property) as of the filing date (without deduction for the costs of sale or marketing). Given the requirement that the redemption price be paid in full, up front, and the fact that it be the "retail" price, the usefulness of this option is, as a practical matter, limited. However, it should be considered as an alternative to reaffirmation, where practical.

Reaffirmation of the original contract.

Although more practical in application, and significantly more common in practice, reaffirmation is a more complicated remedy than redemption.

Before discussing the mechanics of reaffirmation it is important to understand its affect. Bankruptcy generally discharges (what is called) in personam liability. In personam liability is your personal liability for a debt. In personam liability is satisfied by the creditor getting a judgment against you and then executing on any of your assets. By way of contrast, in rem liability is liability that can only be satisfied from the liened property (such as by foreclosing on real estate or repossessing and selling "personal property" assets). The effect of a lien passing through bankruptcy is that in rem liability remains (the creditor can still reposses and sell the property subject to its lien), but your in personam liability (which is your personal liability for any deficiency following the sale of the liened property, is discharged. By reaffirming the debt you agree to remain personally liable for the debt (and to pay any deficiency if you later default and the creditor forecloses on or repossess the property).

For example, assume you purchased a couch in which the seller retained a security interest (i.e., lien) to secure your payment obligation. Assume that at the date of the bankruptcy, you still owed $1000 on the couch, but that the fair market value of the couch (i.e., the amount the creditor would realize if it repossessed the couch and sold it) is $400. The deficiency would be $600. If you did not reaffirm the debt, you would have no "post-bankruptcy" liability for the $600 deficiency. However, if you reaffirmed the debt, and then defaulted on the payments, you would be liable for the deficiency. Of course, the numbers for the couch are small. The deficiency on a vehicle or mortgage default can get into the tens of thousands of dollars (particularly when you also add interest and costs of foreclosure). Given the effect of reaffirmation, it is easy to see why it is dangerous to reaffirm debts where the amount owed is much greater than the value of the property or where you don't have the income to make the payments.

The risk to you (particularly in a case where the property is worth less than the balance due on the debt) is that you default on the reaffirmed debt, and end up being liable to the creditor on a significant deficiency. The result is that your "fresh start," is wiped out.

The moral of the story is that you should not reaffirm a debt you cannot absolutely positively afford to pay.

Assume you have determined that you can afford to reaffirm the debt and you want to do so (recognizing the risk and impact of a later default). In order to reaffirm you must (i) state your intention to do so on the Statement of Intention (which is one of the forms you file as part of your Bankruptcy Paperwork, and (ii) perform your intention (within 45 days after your first scheduled meeting of creditors) by signing an agreement and delivering it to the creditor whose debt is being reaffirmed.

There is, of course, an issue. (You're not surprised by that, are you?)

One of the things you must do, as part of a reaffirmation agreement, is show the Court that your reaffirmation of the debt is not an "undue hardship." If your Schedule J (statement of current expenses) exceeds your Schedule I (statement of current income), there is a presumption of undue hardship and the Court is not suppose to approve the reaffirmation agreement (unless you are getting help from some third party or there is a prospective increase in income or decrease in expenses which will change the Schedule I and J ratio).

We are not certain, at this time, whether a Court's failure to approve the reaffirmation agreement is a bad thing. There are recent cases that have held that as long as you have timely filed your statement of intention and have agreed to reaffirm, the fact that the creditor does not agree, or the Court does not approve agreement, is not fatal to your right to retain the property provided that you are current on your payments and remain current on payments on a going forward basis. You will need to review, with your attorney, the current state of the law in your particular jurisdiction on the affect of a failure of the Court to approve the reaffirmation in deciding upon your course of action.

Negotiating a modified reaffirmation or doing nothing

Redemption and reaffirmation of the original contract represent your statutory options, but they do not preclude other strategies.

Negotiating reaffirmation of an amount lower than the full amount of the debt. Recognizing that their main remedy in the event of a failure to redeem or reaffirm is a state court repossession action, some creditors are willing to let a debtor reaffirm in an amount less than the full debt (particularly where the cost of a state court replevin action will exceed the value of the property). The negotiated reaffirmation amount is typically close to the value of the collateral to be retained. The debt is then paid off according to the terms of the agreement.