Reaffirmation Agreements in Chapter 7 Bankruptcy: To Sign or Not to Sign?
A reaffirmation agreement is a written agreement that some individuals filing for Chapter 7 bankruptcy make with a creditor in order to retain liability for the debt owed to that creditor after the bankruptcy would otherwise have discharged it. Generally, an automobile loan is the only sort of debt for which you might consider signing a reaffirmation agreement in a Chapter 7. (Note that the topic of mortgage loan reaffirmation agreements is worth discussing at length as well, although it is generally not the policy of The Hilla Law Firm to sign them because Michigan law already protects against foreclosure if payments are current. That topic will be reserved for another post on this blog.)
Reaffirmation Agreements: Why Sign at All?
Why sign a reaffirmation agreement at all is always the primary question a person filing for Chapter 7 bankruptcy must consider. The purpose of the bankruptcy is to get you a fresh start, and a Chapter 7 will indeed discharge your legal liability for an automobile loan debt and prevent the lender from harassing you or suing you to collect on the debt at any time after the Chapter 7 bankruptcy. Why, then, would you sign one?
The primary reason people consider signing an auto loan reaffirmation is because they want to keep their car. In the Detroit Metro area, particularly, where distances between home and work can be great and where there are no really effective public transportation solutions, it is actually vital to own a car, unlike some other US metropolitan areas, such as Chicago or New York City or Washington, DC. Here, if you want to work, you need a car, simple as that.
Beyond that, people consider signing reaffirmation agreements because they have an emotional connection with their cars. People love their cars, period, even if the make and model of the car is not particularly outstanding, interesting, unique, or valuable. Even if it is worth far less than they owe on the car loan attached to it.
Another reason is the law itself. It is a bankruptcy myth that, after filing Chapter 7 bankruptcy, you will not be able to obtain credit to buy a new car. Nevertheless, people do worry. And the Bankruptcy Code, the Federal law which governs the bankruptcy process, gives them some reason for that.
In 2005, the Bankruptcy Code was amended to state that, for automobile loans, if a car loan is not reaffirmed within 45 days of the date of the 341 Meeting of Creditors, the creditor holding the note for the loan will have the right to reposses the vehicle even if the borrower is current on payments.
Much litigation has erupted from that blatant, lobbyist-driven legislative give-away to the auto financing industry since 2005, however. The bottom-line of this provision of the Bankruptcy Code is now that “to reaffirm” requires a couple of specific steps which may or may not put you on the hook for the debt afer the bankruptcy would have discharged it. Namely, on the “Statement of Intent” portion of the Chapter 7 bankruptcy petition, “Reaffirm” must be selected as your intent for that vehicle loan. Then, if a reaffirmation agreement is provided by the creditor, you must sign and return it. Your attorney may or may not be able to sign it along with you, as the law prevents a bankrutpcy debtor’s attorney from counter-signing a reaffirmation agreement where there is an “undue hardship.” That is, in the case that your monthly expenses including the car payment exceed your monthly average income—and this is often the case for Chapter 7 debtors. If the creditor files the signed reaffirmation agreement with your attorney’s signature and no undue hardship, it will likely be approved by the court. If the creditor files the reaffirmation agreement without your attorney’s signature here, in the Eastern District of Michigan, you will be required to attend a separate hearing to explain to your judge why you can actually afford to make the reaffirmed payments though, on paper, it appears that you cannot.
Practice here will vary greatly depending upon your location. If the creditor on the loan is a credit union rather than a bank, this will vary as well.
Long story short, however, the judge will approve or deny the reaffirmation agreement. If it is approved, you will be back on the hook for the debt as if you had never filed for bankruptcy—and the loan will continue to be reported on your credit reports as current and not as “discharged in bankruptcy,” as it would otherwise. If the judge does not approve the agreement, you will not be liable for the debt. Frequently, the judge will also order any “ipso facto clause” in the original loan agreement (a clause stating that the mere filing of a bankruptcy constitutes a default entitling the creditor to repossess the car) null and void. If this happens, you will be able to keep making the payments and the creditor will not be able to repo the car—and you will not be liable for it if it turns out that you cannot afford the payments after the Chapter 7 is concluded.
It’s the best of both worlds. Otherwise, failing that “ipso facto clause” ruling, the creditor may or may not repossess the vehicle if you remain current on your payments. Only a few would seem to prefer to reclaim possession of a used car than to keep accepting payments for it.
Only a fully signed, filed, and approved-on-the-court-docket is a valid reaffirmation.
Reaffirmation Agreements: Keeping a Car without Signing
And it is in this latter sort of situation in which the answer regarding retaining a vehicle without signing a reaffirmation agreement may be found. In fact, there are only a few lenders which are actually in the habit of repossessing vehicles where a Chapter 7 debtor has not signed or filed a reaffirmation agreement. An experienced bankruptcy attorney such as those of The Hilla Law Firm, PLLC will be able to advise you as to which lenders are likely to repossess or not so that you can make a good decision as to whether or not to sign a reaffirmation agreement.
It is distinctly possible to simply ignore the reaffirmation agreement, keep making your payments, and also keep your car. Knowing thy enemy is very important here, however, if you value your car.
Reaffirmation Agreements: Worth the Hassle?
Finally, whether any particular car is really worth being in continued debt for, worth attending at least one extra hearing at bankruptcy court along with, potentially, a lost half-day, at least, in wages, as well as additional attorney fees, potentially, is the question that you must ask yourself when deciding to sign a reaffirmation agreement or not. Do you really love your Honda Fit that much? If your car is only worth $2,000 in blue book value, is it worth spending even more money and time to reaffirm a loan for $5,000 on it?
Nearly always, if you have some income, the filing of a Chapter 7 bankruptcy will not prevent you from obtaining a new vehicle. If financing, it will certainly impact your interest-rate, but our clients have not had a problem maintaining their transportation needs during or after a Chapter 7, regardless of signing a reaffirmation agreement or not, yet.
This is the practical consideration that, ultimately, will be up to you to make a call on.
If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or click the button below to schedule a free, initial consultation.