Your Car – Reaffirm, Redeem or Surrender? – NOT!

by Eugene Melchionne, Esq.

October 12, 2007

Recently, a Bankruptcy Judge in Connecticut refused to give a lender the upper hand in forcing a reaffirmation of a car loan in a bankruptcy case. Creditors believed that when they re-wrote the Bankruptcy Code, they would force consumers to reaffirm their car loans. That failed because the language is so awkward.

The law, as currently written, seems to require consumers who file for bankruptcy to either surrender their car to the lender, pay the car loan off in full, or reaffirm the loan putting the consumer back on the hook for personal liability on the account.

Under the old version of the law and in some jurisdictions, there was a ‘fourth option’ allowing the consumer to simply continue with the payments and keep the car. The upside under the ‘fourth option’ was that if something happened to either the debtor or the car so that payment was no longer possible, the vehicle could be surrendered later with no penalty or payment.

For example, if the car was totaled two years after the bankruptcy, the discharge is still effective and the consumer could simply hand the wreckage back to the lender. Pretty good, huh?

The lenders fought long and hard to change the law. And so they did. The new version provides that if you don’t surrender, redeem, or reaffirm, the automatic stay protection of the bankruptcy case is automatically terminated. Great. But if your state law does not allow the lender to repossess if you are current in your payments, then terminating the automatic stay does nothing. The lender is no longer stopped from repossessing, but can’t repo if you are current. Same thing. No go.

So the lenders started filing motions in the Bankruptcy Court to ask for the Automatic Stay to be terminated. They understand that state laws might prohibit reposession in any event and that getting the blessing of the Bankruptcy Court on such a motion, uneducated consumers or less sophisticated lawyers might allow the repo or sign a reaffirmation when it isn’t necessary. Now you are back on the hook, right where the creditors want you. Check out Judge, Please Deny My Reaffirm Agreement.

What did this clever bankruptcy judge do? He said that since the law is clear that the automatic stay terminates automatically, there is nothing for him to do, no motion is necessary, and the creditor is stuck with state law. The Judge didn’t grant the motion or deny it. He did nothing, and in doing nothing, ensured that the creditor got nothing. This is exactly what the lenders wrote into the law and exactly what they got. Nothing!

“ConnecticutGene Melchionne is a bankruptcy lawyer covering the entire State of Connecticut. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

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Last modified: November 19, 2013