By Walter Metzen
In Chapter 7 bankruptcy, you are required to disclose your intent to retain or surrender a car or other vehicle for which you are still making payments.
If you surrender a car, this is simple enough. The Chapter 7 discharges your obligation to continue making loan payments, and the lender will (eventually) repossess the vehicle.
If you plan to keep your vehicle, however, you are required to make a further choice: to either “redeem” or “reaffirm” your vehicle.
The redemption option has been discussed in a separate blog post on this site.
Although the portion of the bankruptcy petition in which you check the boxes to make these declarations contains an option for “Other,” the prior use of this option to declare an intent to “Retain and Pay without Reaffirmation” has been undermined by local case-law in the Eastern District of Michigan.
So what is reaffirmation, and what does it mean to reaffirm your vehicle loan in Chapter 7 bankruptcy?
The Chapter 7 Reaffirmation Agreement Explained
A reaffirmation agreement is the written instrument through which a “secured” vehicle loan is “reaffirmed.”
That circular definition doesn’t explain much, so let’s break it down.
First, a “secured” loan is a loan taken under the condition that some collateral is pledged in guarantee of the loan’s repayment.
A car loan is a secured loan because the car you are purchasing with the loan is pledged as the collateral for the loan in the purchase contract and security agreement that you sign when you finance and buy it.
Other common types of secured loans include mortgages, boat loans, loans for landscaping equipment such as riding mowers, and many others.
Some types of loans purport to be secured (such as loans for household window installation) but frequently fail to comply with Michigan law in that regard and are, in fact, not.
Any type of secured debt must either be surrendered or retained by way of redemption, reaffirmation, or the “other” “retain and pay” option in a Michigan Chapter 7 bankruptcy.
This article will discuss vehicle loan reaffirmation only.
By “written instrument,” we mean “contract.
The reaffirmation agreement is, then, a separate contract entered into during a Chapter 7 bankruptcy that “reaffirms” a secured debt.
“Reaffirm,” essentially means “puts you back on the hook.”
A reaffirmed debt is not discharged at the end of the Chapter 7 bankruptcy process. You remain liable for it should you fail to remain ongoing monthly installment (or balloon) payments.
Why Would Anyone Sign a Reaffirmation Agreement?
This begs the above question: why sign a Chapter 7 bankruptcy reaffirmation agreement? What’s in it for you?
The short answer is—not much.
Generally, people sign reaffirmation agreements for 2 reasons:
- They are afraid to lose a needed vehicle.
- They believe that they have no choice in the matter.
As to Reason #1, this a practicality- and fear-based reason.
In Metro Detroit, it is next to impossible to earn a living without a reliable vehicle. Our public transit system is not only notoriously unreliable but, even on the best of days, it just doesn’t cover the territory that it needs to cover.
Without a vehicle, a debt-load deepens. Without a vehicle, children do not get to school. Family needs are unmet.
It is a common belief among those considering filing for bankruptcy that, after bankruptcy, it will be impossible to purchase another vehicle.
This is a myth.
A new vehicle purchase is not only possible after a Chapter 7 discharge, it is often more possible—depending on how bad one’s credit was prior to the bankruptcy.
This is a point of fear that should be discussed with your bankruptcy attorney before you feel compelled to sign a reaffirmation agreement on this basis.
As to Reason #2, there is some truth here.
The US Bankruptcy Code requires that a vehicle loan be reaffirmed within 45 days of the 341 Meeting of Creditors or bankruptcy hearing that is docketed in every Chapter 7 case.
The 341 Meeting is held roughly 30 days after the date of filing of the case.
The penalty for failing to reaffirm a vehicle loan within that timeframe is that the secured lender has the option to repossess the vehicle at that point—even if you are current on your payments.
It sounds dire, doesn’t it?
But remember what we said up above about it not being that difficult, in many cases, to purchase a new vehicle after the Chapter 7?
Note also that a large amount of Metro Detroit vehicle loans extended to those with shaky credit prior to a Chapter 7 are subprime loans with horrible interest-rates.
Is it such a bad thing to discharge that loan? And dump that car with 90,000 mile and $20,000 somehow yet owed on the loan?
In other words, you are better off without the car, depending on the situation. Thus, this is very often simply a hollow threat.
Further, a number of reputable financing companies (we won’t name names as policies can change overnight) would rather you continue to pay on the loan than go through the trouble of repossessing and then auctioning off at pennies on the dollar a used vehicle for which you are still making timely payments.
It all depends on the lender.
It is worth noting that credit unions in Michigan will always repossess the vehicle, even at a loss. That’s the level of friendly customer service these allegedly “member-owned” institutions specialize in.
Keep that in mind when shopping for your next car.
Reaffirmation Agreements in Michigan Chapter 7 Bankruptcy: The Bottom Line
The bottom line is that you may or may not decide to sign a reaffirmation agreement depending upon the advice of your bankruptcy attorney. Your attorney’s advice will vary depending upon the specifics of your vehicle, your loan, your lender’s policies—and your personal needs.
At the end of the day, however, the decision to sign or to refrain from signing a reaffirmation agreement is yours to make.
That said, your attorney should explain the reaffirmation process to you in detail and provide to you all of the pros and cons of signing a reaffirmation agreement.
Attorney Walter Metzen has successfully represented thousands of Chapter 7 clients through the bankruptcy process for over 28 years.
Contact us now to schedule your free consultation.