Reaffirmation

After the bankruptcy hearing is over there is often one more issue that needs to be addressed:

This is the issue of Reaffirmation

A reaffirmation agreement is simply an agreement that says you promise to pay a debt that was discharged (canceled) by the bankruptcy.

If you had a loan on your vehicle the lender will ask you to reaffirm.

Generally speaking, reaffirmation is something you want to avoid. After all, when you declare bankruptcy you eliminate your debts. Why would you want to revive them?

When you purchase a vehicle and you finance it with a bank or credit union you sign 2 documents:

Document #1) A promise to pay the loan back. “I, Joe Smith, promise to pay Big Bank $10,000 with interest at the rate of 5% over the next 3 years”. Or something like that.

Document #2) A security agreement. The security agreement gives the bank or credit union the power to repossess the vehicle if you default.

When you declare bankruptcy #1 goes away. You discharge that obligation. You don’t owe the money. But #2, the security agreement, remains.

Until a number of years ago, I used to tell my clients: “As long as you keep making the payments, you’re not in default and the bank can’t repossess the vehicle”. So I used to advise all my clients not to sign the reaffirmation agreement. This was called “retain and pay”

That way as long as my client could afford to keep making the monthly payments he could keep the vehicle. But if he stopped making the monthly payments he would just give the car to the bank.

Since the promise to pay the loan back (#1 above) was discharged by the bankruptcy the bank could not sue my client.

Then the banks started pointing out something: They pointed out that buried in the security agreement is a clause that says something like this:

“The act of filing for bankruptcy constitutes a default under this agreement”

In other words, even if the car owner stays current on his monthly payment the mere act of filing for bankruptcy gives the bank the right to repossess the car.

But you might ask: Why would the bank or credit union want to repossess the car if the car owner is making the payments” Wouldn’t the bank or credit union rather have the money every month than a used car which they will have to auction off?

Some banks or credit unions think that way. However, some banks or credit unions have decided that by threatening the car owner with repossession they can coerce him into signing a reaffirmation agreement. That way the bank or credit union can sue the car owner if he stops making the monthly payments. And banks or credit unions like to have the option of suing their customers.

But you might ask: “If I plan on keeping the car why not just sign the reaffirmation agreement? After all I do plan on keeping the car and paying for it?”

The reason you should try to avoid signing the agreement is that you might change your mind about keeping the car. A year after the bankruptcy you might realize that you can’t afford to keep up the payments. You may default and the bank or credit union might repossess the car. If the value of the car is less than the amount you owe the bank or credit union you will be sued for the difference. You won’t be able to discharge that debt in bankruptcy because you only recently declared bankruptcy. (You have to wait 8 years.)

Since it’s generally better to not sign a reaffirmation agreement I usually send the vehicle lender a letter like this:

“Thank you for sending the reaffirmation agreement. Would you allow my client to “pay and retain”? In other words, will you allow my client to keep the vehicle provided my client remains current on the monthly payments?

Thank you in advance. I look forward to hearing from you.”

Many times the lender will send me a letter back consenting to allowing my client to keep the vehicle without reaffirming (as long as they keep making their monthly payments)

But even if the client is allowed to pay and retain (keep the vehicle without reaffirming) he may still want to sign the reaffirmation agreement. Why? Because it may be good for his credit. Many car lenders will not report the payments you’re making unless you sign the reaffirmation agreement. Your credit report may show the balance due the car lender and not reflect any of the payments you’ve made post-bankruptcy. Therefore it may be easier to rebuild your credit if you sign the reaffirmation and have those payments you make reflected on your credit report. There’s a way around this: You get a statement from the vehicle lender of the payments you’ve made, you send it to the credit reporting companies and ask them to correct your record by showing the payments you’ve made.

Also, some lenders will lock you out of their website for bill payment if you do not reaffirm. If that happens you have to mail checks or call in your payments.

So, reaffirmation is a good news/band news thing.

The good news about reaffirming: If you reaffirm then the bank or credit union cannot repossess the car as long as you stay current on the monthly payments. But if the lender is allowing you to “pay and retain” then this is not an issue. Your post-bankruptcy payments will show up on your credit report. You will still be able to use the lender’s website to make your payments.

The bad news about reaffirming: If you stop making the payments the bank or credit union can not only repossess the car but the bank or credit union can also sue you.

Every case is different. We need to make this decision (whether or not to reaffirm) together.

If you wish to reaffirm a debt you must do so before the case closes (usually 60 days from the date of the 1st meeting of creditors).

The subject of dealing with vehicles in bankruptcy is dealt with in detailĀ here.

The situation is different with respect to real estate. You may keep your real estate and avoid

Optional extra credit reading:

There is another approach which I use once in a while if the lender won’t allow you to pay and retain. According to this approach, you sign the reaffirmation agreement but list (truthfully of course) your income and expenses in the agreement so that they show that you can’t really afford to reaffirm. Then the court will set a hearing. The judge will likely refuse to approve the reaffirmation agreement.

There are cases that seem to say that if you do this the bank or credit union can not repossess the vehicle so long as you stay current on the payments. Moustafi, 371 B.R. 434 (Bankr. D. Az. 2007); Coastal Federal Credit Union v. Hardiman, 398 B.R. 161 (W.D. N.C. 2008). However, it is not certain that these cases are an accurate statement of the law and they might not hold up on appeal. Nevertheless, we use this approach in some cases.

If you go through this process you can feel somewhat confident that the lender will not repossess your vehicle as long as you remain current. Some judges will actually make an explicit order stating that you have correctly followed the reaffirmation procedures,. This is called a “ride through” order. Some judges won’t. I generally know which ones will issue the order and which ones won’t. So that will influence us as to whether we’ll try to get the ride through order.

If you can get the judge to make a ride through order you can have even more confidence that the lender can not repossess your vehicle unless you default. If the lender threatens repossession you send it a copy of the ride through order.

Sometimes before making the ride through order the judge will want to make sure that you have in fact followed all the reaffirmation procedures correctly. In particular, the judge may be concerned that you signed and returned the reaffirmation agreement within 30 days of receipt.

I would recommend that you bring proof that you did this to the hearing. If you don’t have proof at the hearing then the judge will probably ask your attorney to file a declaration stating that he returned the signed declaration within 30 days of receipt.

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