It isn’t often I go into bankruptcy court, hoping to lose.
But when the issue is reaffirmation of a car loan, that’s the strategy. I desperately want the judge to deny approval of my client’s proposed reaffirmation of his car loan.
And most of my judges will deliver, from the bench, the pitch I’ve made to the client: you are better off if this reaffirmation is denied.
So, how did we get to this state of affairs?
Like many screwups, it started with Congress.
Or rather, it started with the car creditor lobbyists and their boat-load of money earmarked for Congress.
Bankruptcy “reform” reroutes car loans
In a nutshell, before 2005’s bankruptcy amendments, you could keep your car after bankruptcy so long as you kept making the payments. Simply filing bankruptcy was not a default on the loan; default that allowed repossession required a failure to pay.
In bankruptcy lingo, the idea was called “ride-through”; the car loan rides through bankruptcy as if there hadn’t been a default.
Then along come the lobbyists who “convince” Congress that it’s unfair to them to make them keep accepting payments on a car after bankruptcy. Their complaint was that after entry of the bankruptcy discharge, all they would be allowed to do was auction off the car. The discharge would prevent them from suing the borrower for any deficiency.
So, the law was changed to make filing bankruptcy an event of default. The only way to cure that default after filing was to reaffirm the car loan.
Reaffirmation waives the discharge as to the car loan. Reaffirm, and the car creditor can sue you personally if you stop paying. Even if you got a bankruptcy discharge.
Courts must approve reaffirmations
What the lobbyists didn’t plan for was sloppy drafting of the law they wanted.
The “reformed” law on car loans required the debtor to enter into an agreement to reaffirm the loan AND gave the bankruptcy judge the responsibility to approve the agreement as being in the debtor’s best interests.
And that’s where they blew it.
Courts have regularly held that all that is necessary to entitle the borrower’s car loan to ride through bankruptcy was the debtor’s agreement to reaffirm. The law provided no requirement that the judge approve the agreement to give the creditor the right to sue the debtor after bankruptcy. See Moustafi.
So, under the case law, the debtor gets the benefits of ride-through by just entering into the agreement, even if the judge refuses to approve it. And without approval by the judge, the car creditor can’t sue the debtor if they stop paying on the car later on.
Rooting for disapproval
You see why I want the court to disapprove my client’s proposed reaffirmation agreement. Without the judge’s blessing, there is no deal with the creditor, but the creditor is limited to repossession if the agreement isn’t approved because the debtor did what the law required: agreed to reaffirm.
The reaffirmation process requires the debtor to provide a post-bankruptcy budget that shows that he can afford the car loan going forward. Too many debtors have budgets that really don’t have enough money available for the existing loan. And judges see that.
Judges are further concerned about the gap between what the debtor owes on the car versus what the car is worth today. If the debtor finds that he can’t make the payments, he is exposed to a law suit for the difference between the debt and the value of the car, PLUS the lender’s costs of suing him. Ouch.
I really appreciate the judges before whom I practice who take their responsibility to review reaffirmation agreements carefully and patiently explain to my clients why disapproval of the agreement is in their best interests.
And I grin when I lose this bankruptcy battle. Because my client just won.