Most of our clients have car loans, and most want to keep their cars when they file bankruptcy. There are a few ways to do this. This post discusses REAFFIRMATION.  Later posts will discuss other ways of dealing with car loans in bankruptcy.

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Why Am I Being Asked to Reaffirm My Car Loan?

The bankruptcy code requires filers to choose one of three options for secured debt on personal property like vehicles: (1) surrender the property, (2) TRY to reaffirm the debt, or (3) “redeem” the property.

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 Reaffirmation:  What is It?

Remember that secured debt like vehicle loans consists of 2 “parts”: (1) the creditor’s right to sue you if you don’t pay and (2) the creditor’s right to take back the vehicle if you don’t pay.

Bankruptcy normally wipes out your personal liability on secured debts.

But, reaffirming the loan means you agree to treat this particular debt as though the bankruptcy never happened. You agree to “restore” your personal liability for this particular debt.

This means the creditor can sue you personally for the full amount of the loan if you reaffirm the debt and you become unable to keep up payments. So, reaffirmation is a big decision.

Remember: the lender ALWAYS keeps the right to repossess the vehicle if you don’t make payments and make them 100% on time. This right is unaffected by the bankruptcy, whether you reaffirm or not.

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Will a Creditor Negotiate Terms on a Reaffirmation?

Sometimes. If your original car loan had particularly bad terms, the Creditor might be willing to reduce principal and / or interest to try to get the court to approve the reaffirmation.

We always try to negotiate better terms for all our Clients’ reaffirmations.

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What is the Bankruptcy Court’s Role in the Reaffirmation?

The court has the final say as to whether it will permit you to reaffirm a car loan.

Under Bankruptcy Code Section 524(c), a reaffirmation agreement is unenforceable unless the agreement is approved by the bankruptcy court.

Generally, the court will want to ensure that the car loan  (1) does not pose an undue hardship on the bankruptcy filer and (2) is in the best interest of the debtor.  11 U.S.C. §524(6)(A).

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What Happens at a Reaffirmation Hearing?

If you have an attorney and her or she signs off on your reaffirmation as not being a hardship, the court might not require a hearing on your reaffirmation.

If your expenses greatly exceed your income or you are representing yourself, the court often will require a reaffirmation hearing.

The hearing itself is brief.

The judge will ask you a few questions about your situation including: (1) Is the vehicle a necessity? (2) Were you current on payments when you filed bankruptcy? (3) Did you stay current on car payments throughout your bankruptcy? (4) Have you had a change in your income and / or expenses such that you can now afford the car payment without hardship?

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What Happens if the Court Rejects my Reaffirmation?

If the Court rejects the reaffirmation, you can still keep the vehicle if you have complied with all the requirements for “attempting” to reaffirm your car loan.

These requirements can be found in the bankruptcy code in 11 U.S.C. Sections 362 and 521.  The requirements include:

  • You were current on your payments when you filed bankruptcy.
  • You kept current on your payments throughout your bankruptcy.
  • You have made all payments on time during your bankruptcy.
  • The car is a necessity and your car payment is reasonable.
  • You completed and filed all paperwork related to the reaffirmation (including your Notice of Intent form) properly and within the applicable deadlines.

Remember:  To keep the car when the court has rejected the reaffirmation, you must make your payments and make them on time.

Whether you reaffirm or not, the lender fully retains its right to repossess a car if you do not make payments 100% on time. This means you must not pay even one day late if you want to keep the vehicle.

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What Happens if I Sign The Reaffirmation Agreement, But the Creditor Never Files it With the Court?

When a Creditor sends a reaffirmation agreement to our office, it usually lacks a signature from the Creditor’s representative.

So, we ask you to sign the agreement and then we return it to the Creditor for signature.

The Creditor is supposed to sign it and file the agreement with the court.

For whatever reason, Creditors sometimes fail to file the agreements with the court.

When this happens, there is NO reaffirmation hearing, and the reaffirmation is NOT valid.

This means you are NOT personally liable on the loan.

If the creditor does not file the reaffirmation agreement with the court, you can keep the car as long as you make payments and make them on time.

Whether you reaffirm or not, the lender fully retains its right to repossess a car if you do not make payments 100% on time. This means you must not pay even one day late if you want to keep the car.

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 What Happens if the Court Approves my Reaffirmation But I Change My Mind?

You have the right to rescind a reaffirmation agreement up until the later of these two dates: (1) 60 days after the reaffirmation agreement is filed with the court or (2) your bankruptcy discharge date.