Can I Still Return My Car After My Bankruptcy Case Has Discharged?

Can I surrender a car after bankruptcy dischargeA few times a year I get a call from a former bankruptcy client who received a Chapter 7 bankruptcy discharge and whose case has long since closed. Frequently something has changed in the client’s financial situation—most often the client or his spouse has just lost a job. “I know we stated in our bankruptcy that we wanted to keep our car,” the client will begin, “but we still owe $18,000 on the car, and I’ve just been laid off.” What’s more, the car is now seriously showing its age and may need expensive repairs. “So, can we still give it back to the bank?”

Of course the client can always return the vehicle to the lender, but the all important question here is whether the lender can still sue him after repossessing the car, and that depends on whether the client signed a reaffirmation agreement in his bankruptcy case. If the client did reaffirm the auto loan, then the lender can indeed now sue the former bankruptcy client for the full balance left on the auto loan, less whatever paltry amount the lender gets for the car at auction. By signing a reaffirmation agreement with the auto lender the debtor waived the very bankruptcy discharge that would otherwise have protected the debtor from just such a collection lawsuit and voluntarily agreed to be liable to the auto lender for the full amount of the original car loan in the event of a future default.

If, on the other hand, this former bankruptcy client never signed a reaffirmation agreement in his bankruptcy (and such agreements are only effective if they are entered into as part of one’s bankruptcy case, prior to the discharge), and if subsequently he needs to give up the car because of changed financial circumstances, then he may do so without the fear that the auto lender might be able to collect anything from him. The bankruptcy discharge will protect him from any efforts by the auto lender to collect on the auto loan after repossessing the vehicle.

This is precisely why, no matter what any auto lender might say, reaffirmation agreements in general expose bankruptcy debtors to a grave threat of future liability to their lender if anything changes after their bankruptcy case is over, and they find themselves unable to continue making payments on their car loan.  This is not to say that there is never a situation in which a Chapter 7 bankruptcy debtor should sign a reaffirmation agreement. Under the 2005 BAPCPA changes to the Bankruptcy Code and subsequent case law (see In re Dumont, 581 F3d 1104 (9th Cir. 2009)), auto lenders have the right to repossess a vehicle where the bankruptcy debtor refuses to sign a reaffirmation agreement—even if that debtor remains current with her payments. A few auto finance companies, most notably Ford Motor Credit, have ruthlessly relied on this provision of bankruptcy law to punish debtors who will not sign one. Many other lenders will allow bankruptcy debtors to keep their car without reaffirming, but under current bankruptcy law this is up to each lender’s discretion.

A common situation in which a reaffirmation agreement may be desirable and in the best interest of the bankruptcy client is when the vehicle is nearly paid off and there is substantial equity in the vehicle.  If, for example, the bankruptcy debtor has only a year left to pay off the loan, and has, say, $10,000 of equity in the car, there is little risk to the debtor that she would have any future liability to the lender, even if she did sign a reaffirmation agreement and then defaulted after bankruptcy because with that amount of equity in the vehicle, the lender would almost certainly be made whole upon selling it, even at an auction. Given that I don’t trust auto lenders to refrain from repossession where they might gain a windfall—because the value of the vehicle is greater than the amount owed—I generally advise my San Jose bankruptcy clients in these circumstances that they are likely better off signing the reaffirmation agreement with the lender rather than run the risk that the lender might repossess just because they can.

The question of whether to sign or not to sign an auto loan reaffirmation agreement in bankruptcy can have serious consequences for years to come.  They are just another reason why one should seek only an experienced bankruptcy attorney for advice about filing for bankruptcy.

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