I Signed an Auto Loan Reaffirmation Agreement in my Chapter 7 Bankruptcy, So Now What?

A reaffirmation agreement is, as I’ve written here before, a separate agreement that you may have the option to sign in a Chapter 7 bankruptcy that, essentially, puts you back on the hook for the “reaffirmed” debt as if you had never filed for bankruptcy at all. A Chapter 7 bankruptcy discharges ALL debts owed (except for those deemed to be non-dischargeable by the US Bankruptcy Code, such as child support arrearages or most tax debts, among others), flat-out, unless a debt is “reaffirmed.”

The reaffirmation agreement is a form document with contractual terms of the loans filled in that is provided by a creditor after filing and which requires the your signature, your attorney’s signature IF there is no “undue hardship” (more on this below), and the creditor’s signature. Once signed, it is provided to the creditor, and it is the creditor’s job to file it with the court. If filed and approved, you will be obliged to pay the debt regardless of the bankruptcy.

In most cases, I do not recommend that my bankruptcy clients here in Michigan sign reaffirmation agreements.

When a loan sought to be reaffirmed is a mortgage loan, I NEVER counter-sign reaffirmation agreements because, in Michigan, if you are not delinquent on your mortgage payments, you cannot be foreclosed upon.

With a vehicle loan, however, the law is a bit different.

In the 2005 BAPCPA Bankruptcy Code amendment, the Code was revised to essentially read that a debtor must “reaffirm” a vechile loan within 60 days of the date of the 341 Meeting of Creditors (the lone administrative hearing that a Chapter 7 debtor typically has to attend), or the creditor has the right to repossess the vehicle regardless of whether payments are current or not. But what does this mean, exactly?

Litigation on a relatively widespread scale has resulted in this general interpretation: a debtor, to “reaffirm” per the Bankruptcy Code’s requirements has to do two things: (1) note on the Statement of Intention portion of the Bankruptcy Petition that they intend to reaffirm the vehicle; and (2) sign a reaffirmation agreement if it is provided by the creditor.

From there, many variables determine the outcome, and these variables are greatly dependent upon the jurisdiction in which the case has been filed. My description of what follows pertains only to the Eastern District of Michigan, where I practice.

Here, some auto loan lenders will repo if the loan is current, but most will not. An experienced bankruptcy attorney will be able to advise you properly as to the odds here.

Beyond that practical consideration, however, assuming that you do want to sign and reaffirm such an agreement (as noted above: I often advise my clients not to bother, but this is a fact-specific and case-specific consideration), the question is whether you have an “undue hardship.” What that means is this: if, on paper, as described in your bankruptcy petition, your monthly average expenses exceed your monthly average income, your attorney cannot counter-sign a reaffirmation agreement (unless the creditor is a credit-union, as credit-unions have lobbied & obtained special consideration in the Bankruptcy Code on the premise that they are “owned” by their customers).

If your attorney cannot (or will not) sign a reaffirmation agreement, you may return it to the creditor with your signature alone on it. If the creditor decides to file the agreement without your attorney’s signature, you will, in the Eastern District of Michigan, almost certainly be required to attend a hearing on the matter of whether the court ought to approve it or not. You will be required to explain to your judge why you can afford to make these car payments even though, on paper, it looks like you can’t.

If the judge denies the reaffirmation agreement, it may be the best of both worlds: keep the car, keep making the payments, no repossession, just like a mortgage. The creditor will likely not be able to enforce any “ipso facto” clauses in their loan agreement, which is the clause they rely on to repo a car when the payments are current as the typical ipso facto clause states that the mere filing of a bankruptcy constitutes a default on the agreement and allow the acceleration of the creditor’s remedies (demand for full payment of the loan balance).

However, here, in this part of Michigan, I have never seen a judge deny a reaffirmation agreeement. You can expect that, if you show up for such a hearing and give the judge any sort of logical response to his of her questions, the reaffirmation agreement will be allowed and you will be on the hook for the debt. In additional, local court rules here in the Eastern District of Michigan Bankruptcy Court require your attorneys to accompany you to reaffirmation agreement hearings, and most bankruptcy attorneys will be obliged to charge you for this extra obligatory service.

Thus, the decision to sign a reaffirmation agreement should not be taken lightly.

If you are a southeast Michigan resident considering filing for bankruptcy, please feel free to contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

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