When Does It Make Sense to Reaffirm an Auto Loan in Chapter 7 Bankruptcy?

Reaffirmation Agreements in San Jose Chapter 7 BankruptcyOur Bay Area Chapter 7 bankruptcy clients as well as those who have read my previous posts know that I can be fairly hostile to reaffirmation agreements of car loans in bankruptcy. After all, the whole idea of reaffirming a personal debt that would otherwise be discharged in bankruptcy runs counter to what I, as a consumer bankruptcy lawyer, work to achieve for my clients. Outside of bankruptcy, we all know that if a borrower defaults on an auto loan, the lender can repossess the car and sue for any balance still owed on the loan after auctioning the vehicle. But a bankruptcy discharge eliminates the lender’s right to sue on the promissory note. Sure, the lender could still repossess if the borrower failed to make her payments after filing bankruptcy, but without a reaffirmation agreement, repossessing the car would be the lender’s only remedy. No more lawsuits for the balance owed on an “underwater” car (plus attorneys’ fees, tow truck fees, storage fees, auction fees, etc., etc.)

Signing a reaffirmation agreement for a car loan in bankruptcy means that the debtor agrees to once again become personally liable for the contract debt for his car. It’s like voluntarily giving up the benefit of his bankruptcy discharge for that loan. Why would anyone voluntarily do this, you ask? Because the 2005 BAPCPA changes to bankruptcy law contained a giant giveaway to auto loan finance companies and credit unions, that’s why. Today, if the bankruptcy debtor refuses to sign a reaffirmation agreement of a car loan in his bankruptcy, then the Automatic Stay will automatically expire, and the lender can repossess his car even if he is current on the payments!

Consumer bankruptcy lawyers must explain to our clients the possible consequences of reaffirming or not reaffirming a car loan in bankruptcy. For obvious reasons, as a debtors’ attorney, I am hostile to the very requirement that my client waive her bankruptcy discharge under the coercive threat that she might lose her car built into the Bankruptcy Code.

But there are situations in which signing a reaffirmation agreement may not pose a grave threat to my clients. The best example is where a client has paid on the car for many years, has substantial equity in the vehicle, and will soon pay it off. In that case, even if the client signed a reaffirmation agreement in her bankruptcy, and it was approved by her bankruptcy judge, and she subsequently defaulted, and the lender repossessed, the risk of suit by the lender is lessened by the fact that they should receive sufficient value in auctioning the vehicle to pay off the loan.

Fortunately, I practice bankruptcy in the Bay Area, where the judges of the Northern District of California generally take seriously their role in determining whether a reaffirmation agreement will impose an undue hardship on my bankruptcy clients. Often, our judges disapprove reaffirmation agreements on this basis. When this happens, bankruptcy debtors may fear that they will lose their vehicle. However, although the Ninth Circuit Court of Appeals has not yet ruled on this precise issue, our bankruptcy judges appear to believe that the auto lender cannot repossess from the debtor who in good faith “performs on his statement of intentions,” i.e. by signing the reaffirmation agreement (even though disapproved by the court) as long as he stays current on his car payments.

If you live in the Bay Area and would like to schedule a free consultation with our bankruptcy attorneys, please contact us.

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