Bankruptcy and auto loan reaffirmation

In the process of our Chapter 7 bankruptcy, we’ve had a bit of confusion over what to do with our car loans. As with other debts, auto loans are discharged in a Chapter 7 bankruptcy. But they are secured debts, so the bankruptcy only absolves the filer of the obligation to pay and doesn’t affect the security deed. In other words, you don’t legally have to keep paying, but the lender doesn’t have to let you keep the car, either. This plays out differently in various places.

  • Ride-through: In some jurisdictions and with some lenders, you can keep making payments on your vehicle as originally agreed. As long as it’s kept current, the lender won’t repossess it. If you stop paying, you have to give up the car but they can’t come after you for anything else.
  • Redeem or Retain: You pay off the loan in full, or occasionally, a negotiated reasonable lower value for the car, and then it’s yours to keep.
  • Reaffirm: This involves signing a new agreement to pay under the original terms of the loan, so you are legally back where you were before filing bankruptcy. This option offers the most protection to lenders but is not always a good deal for consumers, especially if there is negative equity involved.

We have two cars included in our bankruptcy. We were current on both loans until we filed Chapter 13 in May, when we were forced to stop paying everything. When we converted to Chapter 7 in July, we stated that our intention was to keep both vehicles.

Neither of our vehicles has any equity, so we decided that our preference was to ride-through on both. Tony’s truck has a Bank of America loan with about 2 years of payments left, and is worth almost exactly what he owes on it. My Mazda is just over a year old, is almost $10k underwater due to some (stupid) rolled-over negative equity, and my loan is with a local credit union.

An attorney for the credit union showed up at both of our 341s with reaffirmation agreements in hand. I stated my intention to reaffirm both times, but have not signed the paperwork yet. The credit union attorney contacted our attorney last week, pushing for reaffirmation and threatening to file for Relief From Stay so they could repossess the car. With just 3 weeks to go until our discharge, I don’t know why they would bother with another court filing, which could take another month or two to happen — but hey, I’m OK with it if that’s what they decide to do. They specified that I would need to make a lump sum payment of $3,500 in order to reaffirm.

In the meantime, we haven’t heard a peep out of BOA. But this week, Tony had a call from a repo man, asking when they could come and pick up the truck. WTF? A quick call to our attorney confirmed that the truck is indeed protected from repo by the Automatic Stay until our case is discharged, and Bank of America could be in big trouble with the Trustee if they come and take it. Our attorney called BOA and was assured there would be no more repo attempts. They also said they have charged off the loan and we are not “eligible” for reaffirmation, but we can start making payments on the truck again and they won’t repossess. So despite the fact that they fucked up in several different ways (why am I not surprised, BOA?), they have offered us an unofficial ride-through without a lump-sum payment, which is good news.

Upon further investigation, I learned that in Georgia, the ride-through is not technically an option, but “back door ride-throughs” are fairly common. If you want to do this, one tactic is to state your intention to reaffirm, and then have your attorney decline to sign the reaffirmation — or hope the judge denies your request. However, it is CRITICAL to research your own jurisdiction to find out what local judges allow, and contact your lender and find out what their policy is on loans that aren’t reaffirmed. Each lender is different, and some (such as Ford Credit) are known for repossessing cars that aren’t legally reaffirmed, even when the loan is kept current.

We haven’t decided what exactly we will do about the car loans. We will probably start paying on the truck again, because the value is so close to what we owe on it. In a pinch, we could sell it, pay off the loan, and be about even. Or we could simply give it up and be done.

The Mazda, on the other hand, may have to go back to the lender. It doesn’t make a lot of sense to go through the ordeal of bankruptcy and not use my opportunity to get rid of the negative equity. Even doing a ride-through is a risk — I could pay them the $3500 to get caught up, and then have them repo the car anyway because they don’t have a signed reaffirmation, which would suck. We’d probably be better off taking that $3500 and using it to buy a beater with no payments. Timing is important – I’d want to hold onto the Mazda until we get the $3500 saved up. But if we’re going to get rid of our debt and start over…let’s get rid of all of it and make a clean break.


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