What is a Reaffirmation Agreement?

Have you just filed a chapter 7 bankruptcy case? Were you still making monthly payments on your car at the time of the filing of your bankruptcy case? If so, chances are, at some point, your bankruptcy lawyer is going to have the discussion with you over the Reaffirmation Agreement. And if he or she is not having “the talk” with you, then read this article. It will hopefully explain things.

So, at the time of the filing of your chapter 7 bankruptcy case your car was not paid off yet and you were still making monthly payments. If you read my last article Do I Get to Keep My Car if I File for Chapter 7 Bankruptcy you know that the chapter 7 trustee will not have any interest in your car. So now the only thing to consider is the role of the bank that financed your car in all of this.  Why are they insisting that you sign a Reaffirmation Agreement?

When you file for chapter 7 bankruptcy most of your debt is discharged at the conclusion of the case. Discharged is a fancy bankruptcy talk for “debt wiped out,” or to put it a more accurately, you are relieved of your personal liability on the debt. Following that line of thought, the car loan that you took out before filing for chapter 7 bankruptcy becomes a dischargeable debt. And there lies the problem as far as the bank is concerned. If you were to stop making payments on the car at some point in the future they would clearly have the right to repossess the car, but they would not be able to sue you as well on the deficiency still owed after the car is sold at auction. They do not like that. They want things to be the way they were before the bankruptcy filing. Hence, the Reaffirmation Agreement.

The bankruptcy courts have ruled in favor the banks on this issue. That is, they have agreed with the banks that if you file for chapter 7 bankruptcy, and despite the fact that  you are current on your car payments following your bankruptcy case, that gives the banks the legal right to repossess the car. And that’s where the reaffirmation agreement comes into play.

What is a reaffirmation agreement? It is the document that the banks want you to sign. It is the document that states that we will not repossess as a mere result of you filing for chapter 7 bankruptcy as long as you continue to stay current on your car payments. So there “sale pitch” is that by you signing the reaffirmation agreement it provides you with 100% assurance that you well not “get punished” by the banks for filing for bankruptcy.  Sounds like a sweetheart deal right? Wrong!

If for some reason you fall on hard times at some point after your bankruptcy case concludes and you can no longer afford to make your car payments, the car lender now not only has the right to repossess your car, but can also sue you on the balance still owed on the car loan. And that is the huge drawback to singing the agreement. Conversely, if you do not sign the reaffirmation agreement, and at some point after you bankruptcy case concludes you are no longer able to make the monthly payments, the bank can repossess your car, but (strong emphasis on the “but”) they will not be able to sue you on the balance of the loan. They will not be able to bring a deficiency lawsuit against you. The signing of the reaffirmation agreement robs you of this critical piece of “insurance.”

So what is my advice to you? Don’t sign the agreement! Despite what the law may be the reality is that if you continue making payments on time, you have nothing to worry about. The bank does not want their car back. They want you to continue making every one of your car payments on time so they can get their hands on thousands of dollars of free money (more commonly referred to as interest). The banks in 99% of instances are bluffing. They will not repossess your car just because you filed a chapter 7 case. Why do I say 99%? Well, over the years, Ford has apparently defied the odds, and done just that…repossess a car just to make a point and put the fear of God into people so that they would sign the Reaffirmation Agreement.

Bottom line, as with many other situation in life it is a cost benefit analysis. In my opinion, the benefit of NOT signing the Reaffirmation Agreement far outweighs the cost of signing one. And what if the unthinkable happens and the bank happens to repossess your car after a chapter 7 filing just to prove a point? Well, you will be amazed at just how quickly you can get a new car loan and buy a new car now that your chapter 7 case has concluded are you are debt free! Life is about calculated risks, and this is one worth taking is how I look at it.

Do I get to keep my car if I file for bankruptcy?

Do you get to keep your car if you file a chapter 7 bankruptcy? Short answer: in most instances the answer is absolutely. The bankruptcy filing will have no impact on your ability to keep your car.

And now for the longer answer. When you are thinking about your car and chapter 7 bankruptcy there are two key players to keep in mind. The first would be the chapter 7 trustee and the second would be the bank that financed your car. In this article I will focus on the chapter 7 trustee and in my next blog article I will turn my attention to the banks and their pesky Reaffirmation Agreements that everyone keeps wondering about.

The chapter 7 trustee is interested basically in only one thing…assets. As in, is there property that you own that has some significant value and that is not protected by certain bankruptcy exemptions?

So, for those who own their car and are no longer making payments on their vehicle the million dollar question becomes: How much is the car worth? What is its current value? You can go to a site like www.edmunds.com to find out. Once you have figured out how much the car is currently worth you now have to know your state’s bankruptcy exemption laws. In the Commonwealth of Virginia (by the way, if someone can remind me why Virginia is considered a Commonwealth instead of a state I would appreciate it) for instance the permitted amount that you are allowed to exempt for your motor vehicle is $6,000.00. If your car is paid off then chances are it is at least five years old and since the car has depreciated in value so much the $6,000.00 exemption will cover you.

But what if you own a BMW or a Mercedez Benz that’s clearly worth more than $6,000? Before you despair just remember that Virginia also has what is called a Homestead Deed, or as I prefer to call it, a Homestead Exemption. And what does the Homestead Deed do for your? Well, in short, it is an additional bankruptcy exemption. The Homestead Deed is a once in a lifetime exemption that you can use with a maximum value of $5,000 (plus $500 for each dependent that you have). The exemption is increased to $10,000.00 if you are 65 or older or are disabled. So even if you are driving one of them “fancy cars”, between the $6,000 car exemption and the Homestead Exemption you should be covered.

And what if your car is financed and not paid off yet? Well, the odds at that point of you having any equity in the car are slim to none. And even if you do have a bit of equity the bankruptcy exemptions will protect you.

So there you have it. If one of your top concerns is “what will happen to my car if I file for bankruptcy” chances are you have nothing to worry about.