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.