Re-Affirmation Agreements in Chapter 7 Bankruptcy, or How To Keep The Car
What does that mean?It means you give it up, buy it out for the value of the contract, or reaffirm the loan and continue to make payments during and after the bankruptcy case.
As a practical matter nobody buys out the contract. If the petitioner could afford that probably they would not be in bankruptcy in the first place.
That leaves two options, give it up or keep making payments.
How does that happen?a. When the case if filed, a form is included that states what the debtor/petitioner wants to do.
b. The lender sends a Reaffirmation Agreement to the attorney.
c. The Attorney send it to the debtor.
d. The debtor who wants to keep the car fills it out and signs it.
e. The debtor sends it back to the lender.
f. The lender files it with the court.
g. The court sets a hearing to consider the agreement.
h. The debtor attends the hearing and tells the judge why they want the car and how they are able to make the payments.
i. The judge makes a call based on the best interests of the debtor from the judge's point of view.
What does the judge's decision mean?In a bankruptcy case there is always a meeting of creditors, at which the trustee assigned to the case asks questions and determines if there are any assets for the trustee to administer. In Chapter 7 cases there are very rarely assets, and in most cases the trustee files a "no asset report" and is out of the case.
After that the court will hear the presentation about the reaffirmation.
IF THE REAFFIRMATION AGREEMENT WAS FILED WITHIN 45 CALENDAR DAYS OF THE TRUSTEE'S MEETING, the following pertains:
1. If the judge says yes, then the petitioner is back on the hook for the debt, and if later the petitioner defaults, bankruptcy will have no effect. In short, the lender takes the car, sells it, and has a right to pursue the petitioner for the difference between the outstanding balance and the sale proceeds.
2. If the judge says no [and IF the reaffirmation was filed in a timely manner], the petitioner can still keep the car subject to the lender's right to reclaim it
If the Reaffirmation is filed in a timely mannerand the petitioner later cannot make the payments, the petitioner is not liable for the deficiency.
The lender will still take the car and sell it, but the outstanding balance left after the sale is considered an unsecured debt and the bankruptcy discharge covers it.
Are reaffirmations a good idea?In my long career I have never seen a reaffirmation that was in fact better than the options otherwise available. Nevertheless debtors pursue this option. Why? Three main reasons:
1. Emotional attachment
2. Can't think of any other option
3. Bad advice
If you are in this situation make sure you have the advice of a local bankruptcy attorney. Bankruptcy law ain't rocket science but it is complicated and an experienced local lawyer is worth the price.
Options?Let's say you are finishing a Chapter 7 case and are now free of all that debt. You want to keep that car, to get to work, to get to the store, to get to anywhere. BUT it's a payment to make every month ...
1. buy an old car for cash and drive it for a year, then give or throw it away.
2. use public transit for commuting to work.
3. put the payment you are not making on that car into a cash fund to use for a purchase next year.
4. consider a lease.
There are other options as well. All we are saying is think it over before you sign that reaffirmation agreement.
Final thoughts11 U.S.C. A?722 allows redemption, and that means paying down the loan to the amount of the vehicle's current value. However, you have to have owned the car for more than 910 days before the bankruptcy filing date. Let's see, that's two and an half years. Not every lender enforces this rule, but they can.
Petitioners enter bankruptcy to get rid of debt, make that your purpose.