The Bizarre World of Reaffirmation

reaffirmation car loan


One of the most difficult tasks attorneys often face is explaining aspects of the law that, when you come right down to it, don’t make any sense.  As my friend and colleague Kenneth Sanders often says, “It’s not logical, it’s not ethical, and it’s not fair: it’s just bankruptcy!”

Reaffirmation agreements, and the legal significance of signing or refusing to sign the agreement, is one of the best examples of the disconnect between common sense, and the law.

I wrote an earlier post about the automatic stay, and why car statements often stop coming.  The automatic stay is a powerful tool, and during your bankruptcy case, it will stop creditors from taking actions to collect the debt.  This includes repossessing your car.  They might, however, send your attorney a reaffirmation agreement, and you should understand the legal consequences of signing- or refusing to sign- this document.

A reaffirmation, simply put, is an agreement to keep your obligation to repay the loan, despite the bankruptcy.  To illustrate the potential risk, let’s use the following example:  You have a car worth $5,000, and you owe $7,500 on it.  After the bankruptcy, you can’t afford to keep making payments.  The car company can repossess the car, and sell it.

If the court approved a reaffirmation agreement, you are still on the hook for the remaining balance.  If there was no reaffirmation, the car company cannot come after you, since you no longer owe the remaining debt.

There is also a risk to NOT signing a reaffirmation agreement.  If you do not sign, the car company can repossess the vehicle after bankruptcy, even if you remain current.  Most vehicle lenders do not exercise this option, but some do.

There is, however, a middle ground that provides the best of both worlds.  For a reaffirmation agreement to become effective, two things need to happen.  The debtor needs to sign it, and the court has to approve it.  Courts generally either defer to the debtor’s attorney, or hold a hearing to let the debtor explain why they want to reaffirm the loan.

As an attorney, I cannot sign off on a car loan if I don’t think it is in your best interest, or if it presents an undue hardship. If your bankruptcy schedules show that you do not have enough money to afford the payment, I cannot in good conscience sign off on the reaffirmation, since we have already shown the court that the payment is an undue hardship.

And THAT is where logic ends and the vagaries of the law take over.  Under an emerging line of cases, if the debtor signs the reaffirmation but the court does not approve it, the debtor gets to have their cake, and eat it, too: they can keep the car as long as they stay current on payments, but if the vehicle is repossessed, the lender cannot pursue the remaining balance.

This “best of both worlds” approach is called a “ride through,” and used to be the norm. The reasoning is that the debtor has done everything they were required to do under the code, and should not be punished because the mean ol’ attorney or the mean ol’ judge refused to ratify the agreement.

As with any emerging issue of the law, your mileage may vary depending on how your district’s judges view the issue. You should definitely talk to your attorney before agreeing to sign- or refusing to sign- any reaffirmation agreement.  In our district, very few reaffirmation agreements are approved by the court, and we see precious few repossessions for debtors who remain current on their payments.



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