Car Loans, Reaffirmation Agreements and “Keep and Pay”

by Brett Weiss, Esq.

June 7, 2008

Before Congress passed the “Bankruptcy Abuse Prevention and Consumer Protection Act” (BAPCPA) in 2005, dealing with car loans in Chapter 7 cases in most states was pretty simple: if you made your payments you could keep your car, and if you didn’t, even though the car finance company could repossess the car, you wouldn’t be personally liable for any deficiency.

This has changed.

Now, you are given three options. The first is to “reaffirm” the car loan. This means that you sign a document, that must be approved by the Court, making you permanently liable for the car loan, regardless of what happens, as if you had never filed for bankruptcy. Reaffirming a car loan means that you keep the car so long as the payments are being made, and if they aren’t made, you’re on the hook. Although reaffirmation was available pre-BAPCPA, it didn’t make a lot of sense in those states where “keep and pay” was available.

The second option is one that was also available pre-BAPCPA: redemption. This involves paying the lender the current market value of the car, in a lump sum. Redemption is almost always used where the car is significantly “upside down”–you owe a lot more on it than it’s worth. Although there are several lenders that specialize in making this sort of loan, many people who file Chapter 7 are not able to make this sort of lump sum payment.

The third option is still “keep and pay,” with a twist. Some car lenders, primarily Ford Motor Credit, will repossess a car, even if payments are current, as soon as the bankruptcy case is discharged, if a reaffirmation agreement isn’t signed and approved by the Court. Most will let you keep the car, but there are no guarantees. And in some states, the Courts have explicitly done away with “keep and pay.”

So, some of you might say, “Well, I’ll just sign the reaffirmation agreement then.” This might not make sense for you, though. If your budget doesn’t show that you have the money to make the payments, if you owe more on the car than it’s worth and can’t redeem the car, or if you’re likely to get into financial difficulties in the future, it might not be in your best interest to reaffirm. In many cases, even if you want to reaffirm, the Court won’t approve the reaffirmation agreement.

Here in Maryland, I am currently challenging Ford Motor Credit’s ability to repossess after discharge where payments are current, but a decision by the Maryland Court of Appeals is unlikely before the Spring of 2009. Until then, due to the risks of reaffirming and where redemption isn’t an option, I usually recommend that clients not reaffirm, at least where the car lender is someone other than Ford Motor Credit, and if the car is repossessed, simply get a new one. (Most auto lenders are happy to loan you the money for a new car as soon as you receive your discharge.)

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Brett Weiss, a senior partner at Chung & Press, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11 and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his law partner, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute, the Bankruptcy Bar Association of Maryland, and the Civil Justice Network. He has been recognized as a “Super Lawyer” every year since 2007 for Maryland and the District of Columbia, and in 2011 received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, The United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.

Last modified: January 3, 2012