Your Chapter 7 bankruptcy is a distant memory. It worked out great. You discharged all of your credit card and medical debt. That back rent you still owed from leasing that apartment with that roommate who ran off with a guy halfway through the lease-term is even finally off of your back.
Best of all, you managed to drive home afterward in your beloved car, Bess, a forest green Jeep Cherokee with a well-earned Appalachian Trail sticker on the rear window. You had a year’s worth of payments left on Bess when you filed your Chapter 7, and you weren’t worried about those.
Your car was not the reason you filed for Chapter 7 bankruptcy. In fact, you didn’t think your car was even included in the Chapter 7 bankruptcy.
Further, you counted on those future timely auto loan payments to help rebuild your credit after your bankruptcy was over.
However, your car loan lender is now reporting the car loan as “Closed; discharged in bankruptcy” as all of your credit card and other creditors are.
But you haven’t missed any car payments and have only one more to go.
A phone call to your lender is not received well.
“You included your car in the bankruptcy,” the curt customer service rep on the other end of phone line snaps. When you ask about your credit reports.
You call your bankruptcy attorney to inquire.
CAR LOANS AND BANKRUPTCY: INCLUDED OR NOT?
Your bankruptcy lawyer is happy to hear from you and pleased that life is going well for you.
However, he reminds you of several aspects of the bankruptcy process that you now recall that he described fully for you a couple of times throughout the Chapter 7 process, including way back at your free initial consultation appointment, the first time you met.
No worries, he says: it’s easy to forget all of this detail even after a handful of months.
It is, after all, what bankruptcy attorneys do all day long. You have other things on your mind.
But was the car loan “included” in the bankruptcy?
Yes, he reminds you. All debts are, one way or another, “included” in a Chapter 7 or Chapter 13 bankruptcy proceeding.
There is no option available under the US Bankruptcy Code to leave a debt “out” of the bankruptcy. That is a common myth.
The only question with regard to a debt and the bankruptcy process is whether it is dischargeable or not.
Some debts are not dischargeable, such as child support obligations or recent tax debt or, in most cases, student loans. Car loans, on the other hand, are very dischargeable.
When you file for Chapter 7 bankruptcy, all debts and all assets must be disclosed in your bankruptcy petition—whether or not they are dischargeable, whether or not you want to keep them or surrender them.
In a Chapter 7 bankruptcy, the discharge you ultimately receive in the case will simply wipe out all debt that you owe that is dischargeable.
Therefore, unless you “reaffirm” the car loan in the Chapter 7 bankruptcy, your personal obligation to make that car payment every month is indeed discharged.
When that happens, even if you are making your payments in a timely fashion after the Chapter 7 bankruptcy is over with, the debt will still be listed as “Closed; discharged in bankruptcy” on your credit reports just like every other discharged debt.
That said, your bankruptcy lawyer continues, your car loan lender still keeps its lien on your automobile’s title.
If you don’t make those car payments, the lender can repossess the vehicle, even though it cannot sue you after Chapter 7 for past due auto loan installment payments.
In a Chapter 13 bankruptcy, on the other hand, you must file a Chapter 13 Plan with the Bankruptcy Court that either affirmatively retains a vehicle and commits to paying it off in one way or another—or surrenders it outright.
Wait a Minute: What Was that Bit About the Reaffirmation Agreement in Chapter 7? Did I Sign One?
A reaffirmation agreement is a separate contract that is provided by the lender of a vehicle, mortgage, or other “secured” debt in a Chapter 7 case.
It may or may not mirror the terms of your original contract for that debt.
If you sign it, the lender signs it, and it is filed and approved (if necessary) by the Bankruptcy Court, it re-obligates you personally to that debt after your discharge is issued and your case closes.
You’re back on the hook, in other words.
If you fail to make timely payments, your lender can pursue you personally for collections and payment as if you had never filed for Chapter 7 bankruptcy.
Your lender has the right to report post-bankruptcy-filing missed payments to the credit bureaus as well.
Why would you sign one?
Really, only because the Bankruptcy Code was amended in 2005 to require that you either surrender, redeem, or retain-and-reaffirm a vehicle or other secured personal property loan in a Chapter 7 bankruptcy.
Between 2014 and 2017, the judges of the Eastern District of Michigan Bankruptcy Court issued a series of rulings holding that, in a Chapter 7, you had to reaffirm if you want to keep the car.
In 2017, in particular, our Chief Judge Phillip Shefferly ruled that you could not any longer check the “Other” box on that particular Form of the Bankruptcy Petition and write in “retain and pay” or “ride-through” however many local bankruptcy attorneys continue to do so, especially in cases in which their client wishes to retain a vehicle with a subprime finance company with an extremely high interest rate for which signing a reaffirmation agreement would not be in the client’s best interest.
This was the prior strategy of refusing to sign a reaffirmation agreement but retain the car by faithfully making all monthly payments going forward.
Judge Shefferly held that the 2005 BAPCPA Bankruptcy Code Amendments eliminated this option. Failing to reaffirm a vehicle loan with 45 days of the 341 Meeting of Creditors results in an automatic lifting the “automatic stay” injunction preventing your lender from repossessing the vehicle.
You’d still discharge the debt—but you could potentially lose the car. In reality, most subprime lenders will not repossess the vehicle so long as the payments are still being made by the debtor after the bankruptcy case is filed, even in the absence of a signed reaffirmation agreement. In practice, many of the subprime lenders do not even send a proposed reaffirmation agreement to debtor’s counsel for consideration.
So, did you sign a reaffirmation agreement in your Chapter 7 for ol’ Bess?
Your bankruptcy attorney consults his notes and your case docket and reminds you that, yes, you did sign a reaffirmation agreement.
In fact, the two of you discussed in detail, and he had advised you of the pros and cons of the thing.
Given that your lender—despite BACPCA—is not known for repossessing cars when a reaffirmation agreement is not signed and given the few remaining payments owed on Bess, he reminds you that he had, indeed, advised against signing one. He emails you over a waiver you’d signed acknowledging receipt of the pros and cons of the reaffirmation process.
You’d forgotten about that entirely!
However, despite those “cons,” you hadn’t wanted to take a chance. After all—your hiking boots and snowshoes and skis fit just perfectly into that car!
You completed signed the reaffirmation agreement, it was returned to your lender, and your lender then duly counter-signed it and filed it on the Bankruptcy Court’s docket.
Your bankruptcy lawyer emails you a copy of the signed and filed reaffirmation agreement and suggests that, given the reaffirmation agreement, your lender is may be in violation of the Fair Credit Reporting Act for failing to report your timely payments to the credit bureaus.
Your bankruptcy lawyer recommends following the instructions on each of your credit reports to dispute the reporting and to consider contacting an attorney specializing in Fair Credit Reporting Act claims should that not correct issue.
WAS MY CAR INCLUDED IN MY BANKRUPTCY? THE BOTTOM LINE
The bottom line is that, if you’re wondering if you included your car in your bankruptcy—you did.
The question is, in either a Chapter 7 or Chapter 13 bankruptcy, how it was treated in your bankruptcy petition and/or Chapter 13 Plan and whether or not you continued making your required car payments or not afterward.
Attorney Walter Metzen has represented over 20,000 consumers in Chapter 7 and Chapter 13 bankruptcy cases in Michigan. A Board Certified Bankruptcy Expert, Attorney Metzen has dealt with secured creditors and in the bankruptcy process for over 28 years.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing a Chapter 7 or Chapter 13 bankruptcy in Michigan.