Last week, we addressed whether or not a debtor should consider reaffirming mortgage debt to ensure that their right to remain in their home, in the event the debtor does not reaffirm debt secured by real property. One open question is whether a the failure to reaffirm a debt creates a risk that the lender may foreclose on an otherwise current mortgage gives the lender the right to immediately foreclose on the mortgage. Many mortgages contain a term whereby the act of filing bankruptcy constitutes a default, even if payments are current, and the bank can recover its security interest securing the loan.
Prior to the 2005 Bankruptcy Abuse Protection Act (“BAPCPA”) reforms, debtors could retain personal property (mortgages, car loans, etc.), provided they remained current on the monthly payments, called "ride through". However, BAPCPA largely eliminated the so-called “ride through” option for security interests in personal property; the result of which is that now, in order to keep personal property securing a loan, the debtor and creditor would have to execute a reaffirmation agreement. In a reaffirmation agreement, the creditor would contractually exclude the debt from discharge in bankruptcy.
While the law was clear that BAPCPA imposed a reaffirmation requirement on personal property transactions, the law made no clear indication as to whether a debtor could retain a security interest in real property, absent a reaffirmation agreement. Recently, in In re Caraballo, the Connecticut Bankruptcy Court addressed this issue, and determined that debtor’s ongoing retention of real property does not require the execution of a reaffirmation agreement. 386 B.R. 398, 400 (Bankr. D. Conn. 2008). As such, bankruptcy petitions may keep their property during and after bankruptcy, as long as they remain current on their payments. Additionally, the “ride through” option preserves the previous terms of the loan or finance agreement, thereby preventing creditors from imposing harsher terms on debtors during the bankruptcy process.”
The Caraballo court, in reaching its conclusion, held that the mortgage holder could not foreclose on the debtor who did not reaffirm as long as payments continued on the mortgage, thereby providing an additional layer of protection to a debtor who has not reaffirmed his mortgage debt (either intentionally or at the lender’s refusal), and adds an additional layer of complexity when determining whether or not to reaffirm mortgage debt.