Is it possible to keep your vehicle after bankruptcy without reaffirming your car loan?
This article discusses an approach we use called obtaining a Ride Through Order.
If you haven’t already done so please read the article Dealing with Vehicles in Bankruptcy
As you see Alternative 4 is to Pay and Retain. In this approach, you simply continue to make your monthly payments after bankruptcy and keep the vehicle. If, after bankruptcy, you fail to keep up with the payments the lender repossesses the vehicle but you don’t owe the bank any more money.
Alternative 4 is what I advised my clients to do before 2005. But in 2005 Congress changed the law so that the vehicle lenders had the right to repossess your vehicle even if you remain current on your payments. After the law changed in 2005 vehicle lenders began to use the threat of repossession to get you to sign a reaffirmation agreement.
Why do vehicle lenders want you to reaffirm the vehicle loan? The vehicle lenders want you to sign the reaffirmation agreement because they want to be able to sue you (after repossession) if you default on the car loan.
Let me give you an example of what I’m talking about. Let’s say a few years before filing bankruptcy you buy a car and agree to make $350 monthly payments. Your income decreases and you can’t pay all your bills. You stop paying on your credit cards. But you keep paying on your vehicle because you need your car. You hire me to do you bankruptcy to get rid of all that credit card debt. We file the bankruptcy but you keep making those car payments because you don’t want to lose the car. You hope that your income will increase but a year after the bankruptcy you are so broke you can’t keep up with the car payments and the car lender repossesses your car.
When this happens, let’s say, your car is only worth $2,000 but you still owe $3,000. If you haven’t reaffirmed you don’t owe the $1,000 difference because you’ve discharged that debt in bankruptcy. If you have reaffirmed then you will be sued for the $1,000 plus attorney’s fees.
So reaffirming can be bad because it allows the bank to sue you even though you’ve declared bankruptcy. But since 2005 not reaffirming can also be bad because the bank may repossess the car even though you’ve been current on the loan payments.
Is there a way out of this dilemma? One approach I use is to try to get the bankruptcy judge to issue a Ride Through Order. This is Alternative 6 in the article Dealing with Vehicles in Bankruptcy.
Here’s how this approach works:
There are cases including Moustafi, 371 B.R. 434 (Bankr. D. Az. 2007) which hold that if you have declared you intention to reaffirm in time and you sign and file the reaffirmation agreement the vehicle lender can not repossess your vehicle as long as you remain current on your vehicle loan payments EVEN THOUGH THE COURT DOES NOT APPROVE THE REAFFIRMATION AGREEMENT.
In other words, according to this Moustafi case, if you follow those 2 simple procedures (declare your intent to reaffirm and sign and file the reaffirmation agreement) you are put back into the position my clients were in before 2005. Namely, you can retain the vehicle as long as you continue to pay for it even if you do not actually reaffirm because the judge wouldn’t let you.
Why would the judge not approve the reaffirmation agreement? The reason the judge may not approve the reaffirmation agreement is that the papers show you can’t afford it. When we fill out the reaffirmation agreement we state your monthly income and monthly expenses. If the papers show your income is less than your expenses then the judge will usually not approve the reaffirmation and some judges will issue the Ride through Order.
When you appear at the hearing on the reaffirmation agreement you will be in a tricky situation. You have filed the reaffirmation agreement and, on paper, you are asking the judge to approve it. But you don’t actually want the judge to approve it so you can get the Ride through Order. Here’s the tricky part: The approach you need to take is to answer the judge’s questions in such a way that it appears that you will not be able to afford the monthly payments even though, on paper, you are asking the judge to approve the reaffirmation agreement.
If all goes well at the hearing on the reaffirmation agreement the judge rules “against you” and does not approve the reaffirmation agreement. Then under the Moustafi case the vehicle lender must allow you to pay and retain the vehicle. Some, but not all, judges will actually issue an order that explicitly states that the lender may not repossess the vehicle so long as you remain current.
A problem with this approach is that no appellate court has ruled on whether Moustafi is good law. It could be ruled invalid. An appellate court might rule that you must successfully reaffirm in order to take away the car lender’s right to repossess the vehicle on which you are remaining current. But unless and until that happens we are using the Moustafi case as our guide.