Keep your car through bankruptcy without risk

Debtors whose budget shows they can’t afford to reaffirm the loan on their car may get to keep the car without reaffirmation under a line of decisions by bankruptcy judges.

A number of judges have ruled that “pay and drive” survives bankruptcy reform if the debtor signs a reaffirmation agreement that is denied by the judge as not being in the debtor’s inerest.  Lose in court and drive away in your car!

Most debtors are in a bind with respect to their cars.  The car is needed to get to work and buying a car to replace the one they have when they file bankruptcy is not possible.  My colleague Brett Weiss described the apparent choices for bankruptcy debtors with car loans.

Bankruptcy reform legislation in 2005 attempted to eliminate the debtor’s option to keep paying on a car after bankruptcy without becoming legal responsible for the loan balance which was often fra more than the value of the car.  Car lenders succeeded in getting a provision that allowed them to repossess a car after bankruptcy even when the payments were current. The debtor’s only option if they need to keep the car was to agree to pay the full amount of the loan balance.

Judges are required to find that a proposed reaffirmation is in the debtor’s best interest.  That’s often a problem when the debtor’s budget shows that the budget including the proposed car payment is upside down.

In Husain, 364 BR 211, Judge Huennekens solved the problem by finding that although he would not approve the debtor’s request for approval of a reaffirmation,  the debtor’s willingness to reaffirm met the statutory requirements and prevented his bankruptcy filing from being a breach of the car loan.  Without a breach of the contract, the lender could not repossess the car.

This result still has the debtor paying $15000 for a car worth $8,000, but the debtor was spared the risk inherent in reaffirmations that if he later defaulted on the loan, he would be personally liable for any deficiency on the car loan.