New California law, effective January 1, 2023, eliminates the need for bankruptcy debtors to reaffirm car loans in order to avoid repossession.
Now, you can keep your car after bankruptcy, so long as you keep the payments current, without reaffirming the debt.
Until now, reaffirmation had the effect of giving up the discharge as to a car loan in order to prevent the filing of bankruptcy being a default on the loan. When simply filing bankruptcy was a default, the car could be repossessed after the bankruptcy was over, even if you’d made all of the payments.
Now, filing bankruptcy alone is not a default on the loan, triggering repossession.
This change to California law returns us to the situation before bankruptcy “reform” in 2005. Bankruptcy lawyers called it “keep and pay” or “pay and drive“, or “ride through“. They’re all terms that describe the debtor’s option to discharge their personal liability for the car loan, but keep the car so long as they made the contractual payments.
Reaffirmation was tortuous decision
No consumer should mourn the passing of reaffirmation.
It presented a debtor, already financially stressed, with having to decide whether to reassume the car loan contract or to live with the possibility the lender would repo the car. Reaffirmation made the debtor again liable for any shortfall between the value of the car and the loan balance.
Some pitched reaffirmation as a way to rebuild credit after bankruptcy, though the evidence suggests reaffirmation did not help credit scores.
What law changed
Specifically, the new provisions void any provision in a car loan contract that makes filing bankruptcy an event of default under the contract. Failure to pay, before or after bankruptcy, remains a default. So, this isn’t a free car if you file bankruptcy.
The new provisions are found in California Civil Code 2893.3(a)(2), below, and echoed in California Finance Code 22329.
(2) Neither the act of filing a petition commencing a case for bankruptcy under Title 11 of the United States Code by the buyer or other individual liable on the contract nor the status of either of those persons as a debtor in bankruptcy constitutes a default in the performance of any of the buyer’s obligations under the contract, and neither may be used as a basis for accelerating the maturity of any part or all of the amount due under the contract or for repossessing the motor vehicle. A provision of a contract that states that the act of filing a petition commencing a case for bankruptcy under Title 11 of the United States Code by the buyer or other individual liable on the contract or the status of either of those persons as a debtor in bankruptcy is a default is void and unenforceable.
Cal. Civ. Code § 2983.3
Eliminating reaffirmation not tied to exemptions
This restored right to keep and pay is not tied to a debtor’s choice of exemptions. It applies to any Californian who has filed bankruptcy while still owing on a car loan.