“Keep and Pay” Strategy in Chapter 7
Keep Your Property But Don’t Reaffirm a Secured Obligation
Prior to 2005, many Chapter 7 lawyers rarely or never advised their clients to enter into a formal reaffirmation agreement to keep and pay property encumbered by a security agreement. I recall, for example, a case I filed in the early 2000’s in which my client filed Chapter 7 and wanted to keep her 2004 Chevrolet Caprice that was subject to a $24,000 loan in favor of Southtrust Bank. My client was a commissioned salesperson and she was concerned about reaffirming the Southtrust loan and obligating herself to a $481 per month payment for the next 50+ months.
Reaffirming this debt would mean that bankruptcy protection would no longer apply - should my client fall behind 2 years from now and a repossession result, my client would be liable for any deficiency claim following an auction sale.
Instead of reaffirming, we decided that the best strategy was to “keep and pay.” My client continued to pay the $481 per month note during the course of the bankruptcy and thereafter. The lender tacitly agreed to continue to accept the payments and my client exited her bankruptcy with vehicle intact, but personal liability extinguished.
Pros and Cons of “Keep and Pay”
Here is the key to “keep and pay:” since there was no reaffirmation agreement, the Chapter 7 discharge eliminated any personal liability on the part of my client. Southtrust’s secured status remained - if my client would have become delinquent, Southtrust would have the right to repossess the vehicle, but my client would never be liable for any deficiency claim on a repossession.
“Keep and pay” was a great option - with two caveats:
- the lender had to be agreeable to the idea. Some lenders (in particular some of the larger vehicle finance companies) insisted on reaffirmation agreements. If we refused, they would turn to a provision in the security agreement and promissory note in which a bankruptcy filing triggered a default, and they would file a motion for relief from stay to demand possession.
Fortunately, very few lenders took this position and over the years I guided my clients through “keep and pay” for vehicles, furniture and mortgages.
- with personal liability eliminated, the debtor’s credit would not benefit from current payments. The main reason that many of my clients desired reaffirmation had to do with the restoration of their credit. If personal liability was extinguished by a bankruptcy discharge and there was no reaffirmation, the affected lender would continue to accept payments but would not report favorably to the credit bureaus. For many of my clients who planned to stay in their homes or keep their vehicles, reaffirmation was a great way to rebuild credit quickly.
- a third, relatively minor issue - with personal liability extinguished by the bankruptcy discharge, the lender would no longer send my client a monthly statement and would not communicate with my client - at least until I wrote a letter authorizing such communication.
2005 Bankruptcy Code Amendent: the
End of “Keep and Pay?”
With the change in the bankruptcy laws in 2005, “keep and pay” presumably disappeared. Section 521(a)(7) provides:
If the debtor fails to [either reaffirm or surrender] within the 45-day period [after the Section 341 meeting of creditors], the stay under section 362(a) is terminated with respect to the personal property of the estate or of the debtor which is affected, such property shall no longer be property of the estate, and the creditor may take whatever action as to such property as is permitted by applicable nonbankruptcy law.
In other words, the debtor has a choice - either reaffirm or surrender. If the debtor does nothing, the creditor may treat such inaction as a surrender. More importantly, the if the debtor did not reaffirm, the debtor could not include an allocation for a monthly payment to the secured creditor in his budget.
In the weeks and months following the effective date of the October, 2005 changes to the bankruptcy laws, there was no consensus among debtors, creditors, trustees or bankruptcy judges regarding this apparent elimination of “keep and pay.”
“Keep and Pay” Returns as a Viable Tactic for
Debtors Who are Unable or Unwilling to Reaffirm
Over the years, however, it appears that “keep and pay” has quietly been reintegrated into the system. I am not aware of any cases in the Northern District of Georgia in which a trustee or creditor objected to discharge on the grounds that a debtor wanted to pay a secured debt without formally reaffirming the obligation. This does not mean that trustees or creditors will not or cannot pursue such objections, but there does not seem to be much enthusiasm for such a position.
As discussed elsewhere on this site, at least one judge in the Northern District of Georgia has issued a decision interpreting the Code’s language on attorney participation in the reaffirmation process, and trustees from other districts have written articles identifying the practical problems with the Bankruptcy Code’s requirements for secured debt reaffirmation.
So, at this point, it appears that “keep and pay” remains a viable alternative for Chapter 7 debtors who are unwilling or unable to enter into a formal reaffirmation agreement.
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