What is a bankruptcy reaffirmation agreement? Do I need one?
June 12, 2012 1 Comment
A reaffirmation agreement is simply an agreement that reaffirms or recreates a contract that has been broken by your chaper 7 bankruptcy. After you file for bankruptcy all of your previous contractual obligations for things like credit cards, auto loans, jewelry and furniture loans, mortgage loans, and leases for personal or real property go away. You no longer have those contractual obligations once you pull the trigger and file your case. If your case goes all the way to discharge then these obligations go away forever.
This is what makes bankruptcy such a powerful tool for people. Any contract that is difficult, onerous, or they just can’t afford is cancelled by bankruptcy. This is what gives you a fresh start when it is all over as you can go on in life free from these big contractual balls and chains.
The problem is that some of these creditors have a secured interest in some property you bought from them. This is not true of credit cards which are unsecured but it is true of cars, boats, jewelry, and furniture as well other types of property you could finance. Whenever you buy something and make regular payments for it the seller probably took a security interest in the property you bought from them.
Though the contractual obligations owed by you are cancelled in a bankruptcy this security interest gives finance companies certain rights in the property that you purchased. They can move against the property to repossess it after the bankruptcy case closes (or if they file a motion for relief from stay).
It used to be before the 2005 bankruptcy law change that you could buy a car, go bankrupt, and then continue to pay for and keep the car. This was called the “ride through”. You had that right before 2005 and people regularly did this in bankruptcy. The creditors hated this because you could turn the car in at any time thereafter and be done with it. Creditors could not then come after you for the “deficiency balance” because the contract was cancelled in bankruptcy. They would be stuck with only the car of limited value.
So the creditors eliminated this option in the 2005 law. A case called “Dumont” in the 9th circuit confirmed this and that was that. Now the ride though option is gone and you must either reaffirm, pay off the balance, or surrender the car.
Even having said this though there is a loophole out there. Most creditors will allow you to keep the car and pay though they are not obligated to do so because they don’t want people to return cars. Many bankruptcy filers will not reaffirm and if the car company wants the car back then they will return it. We call this “let them eat steel” because the finance companies then sell this car at a great loss when the could have had some payments.
Many car companies recognize this fact and they have allowed the “ride through”. They therefore don’t exercise their legal right to repossession and they allow you to keep the car as long as your payments are current.
But there are those others like Ford and in San Diego the San Diego County Credit Union. These lenders tend to demand that debtors sign and file reaffirmation agreements with the court or they will pick up their cars. It appears that they may just want to make a point or scare people into signing reaffirmations.
It gets complicated here but you must at least attempt to get a reaffirmation agreement in the court or the creditors can and some will pick up cars. Losing the car can be extremely inconvenient for those who want and need the car or for those who recently put down a large down payment. It is also true that financing a new car can be difficult and costly right after a bankruptcy so sometimes reaffirmations make sense. (Have your bankruptcy attorney discuss these issues with you when you are considering signing one).
If you go into court and attempt to get a reaffirmation and it is denied for some reason by the judge who does not think it in your best interest then there is still an out. Many judges will insert special language into the judicial order that denies the reaff. that will prevent any pick up of the car by the finance company. Consult your bankruptcy attorney in your area as he or she should know which judges do this and he will be sure to request such language into the judicial order.
This is especially necessary if you have one of those lenders who tend to be more demanding like Ford or in San Diego, the San Diego County Credit Union.
I am a San Diego bankruptcy attorney. For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com. Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015. Call now for free credit report and analysis! For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at email@example.com.
Contract photo courtesy of Steve Snodgrass.