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The Price of Keeping the Car

By Cathy Moran

Car manufacturers lobbied Congress to make it harder for debtors to keep their cars through bankruptcy.  And they got what they sought.

In Chapter 7, that was accomplished by eliminating the “ipso facto” clause, which said that merely filing bankruptcy was not a breach of the purchase contract. The expectation was that debtors would reaffirm their car loans, giving the car lender the right to sue for a deficiency judgment against the debtor should the debtor later default, rather than risk losing the car.

Reaffirmations would diminish the debtor’s discharge and lock the debtor into paying for a car that might well be worth substantially less than the loan balance.

Debtor’s attorneys were expected to certify that repaying a car loan would not create a hardship for the debtor; if the attorney wouldn’t/couldn’t so certify, the reaffirmation agreement needed to be approved by the bankruptcy judge after a hearing. Most bankruptcy judges were less than enthusiastic about this new role.

Debtor’s lawyers have wondered about the continued existence of “pay and drive”, the practice of car lenders allowing the debtor to keep the car for so long as the payments were current and the car insured. Putting debtors to the test of reaffirming a badly upside down car or returning it to the lender might not be such a great idea for the auto industry if debtors shucked their greatly depreciated vehicles.

At last weekend’s banrkuptcy seminar, judges and lawyers reported that in practice, only Ford Motor company is routinely repoing vehicles where the post bankruptcy debtor has not reafffirmed the debt but remains current on payments and has insurance. All the rest of the lender community has apparently figured out that they do not want to “eat steel” and take possession of a flood of cars worth less than what is owed from debtors willing to continue paying for them.

Perhaps, a bit of common sense has inserted itself in the world of BAPCPA.

 

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  • Time Running Out To Claim Prior Year Tax BreaksTime Running Out To Claim Prior Year Tax Breaks
  • Tax issues in subprime mortgage meltdownTax issues in subprime mortgage meltdown

Filed Under: Consumer Rights

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

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You’ve arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said “try”).

Here, I allow myself to tell stories and express strong opinions. We dig deeper into how to consider bankruptcy and navigate a bankruptcy case.

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Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

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