There’s a new scene up in the Bankruptcy Court in Pittsburgh recently. Judge Carlota Bohm is the judge assigned to the vast majority of Chapter 7 cases. She took the bench as a new judge about a year ago. Before she took the bench, judges rarely scheduled hearings when you wanted to sign a reaffirmation agreement. Now, we’ve got hearings, albeit brief ones, and a lot of folks aren’t sure why.
First, a reminder about just what a reaffirmation agreement is. Whenever you have a secured debt for a car or mortgage loan, you must choose on your Statement of Intentions what you want to do with the loan. In other words, are you going to surrender that car, or are you going to keep it. And if you’re going to keep it, are you going to reaffirm the loan in Court or are you going to “retain and pay”?
Specifically, a “reaffirmation” of a debt is when you formally waive the discharge as to that debt. In other words, you state to the Court that you will be on the hook for that debt, no matter what happens in the future.
Most people react sharply, and tell me that of course, they want to keep their cars, and of course they need their car to get to work, etc., and that they absolutely want to reaffirm it. I respond that it’s more complicated than that.
The 2 Cons
1) Deficiency Judgments. Lenders and banks absolutely want you to reaffirm your loans when you file bankruptcy. Why? Because if you default on your car loan 6 months or a year after your case is over, then they can repossess your car, and then sue you for the balance on the loan. Remember that cars depreciate quite a bit, and the car on which you owe $20,000 will be sold at a dealers-only auction for $6,000 or $7,000. Then the bank will sue you for the remaining $13,000 or $14,000. Ouch. But you don’t reaffirm, then they can’t sue you for this balance. If you do reaffirm, then yes,you’re on the hook!
2) Gap Insurance. Let’s say that you reaffirm your loan, and someone hits your car. Let’s say that your car is totalled. Your car insurer will pay the fair market value of your car. Your insurer isn’t going to necessarily pay off your car loan (unless you have gap insurance). If you don’t have gap insurance, you might wind up with a totalled car, AND a balance owed on your loan. Ouch again.
The 3 Pros
1) Credit Rebuilding. If you decide to reaffirm, then IF you make your future payments on time, then those payments will help to rebuild your credit rating. Note that this could be a hindrance if you wind up paying the same loan late! But if you do not reaffirm the loan at all, then your payments will not show up on your credit report at all; it will appear instead that the loan has been wiped out (discharged).
2) Invoices and Statements. If you do not reaffirm your loan, then your lender will not send out monthly loan statements. Yes, if you retain the car or house, then you still owe the money and need to make a payment, but you’ll need to photocopy an old statement to make sure you know the account number and payment address.
3) Website access. This is similar to number 2. If you do not reaffirm your loan, then you won’t be able to make payments electronically on your lender’s website. Yes, you can still make a payment via your bank’s website, or you can mail in a payment. This isn’t a huge deal, but it can be annoying. Clearly, the banks are trying their utmost to get folks to reaffirm their loans.
Retain and Pay
My take on reaffirmation agreements is that I don’t encourage clients to reaffirm on car loans, but I don’t worry as much about mortgage loans being reaffirmed. Why? Please remember that I write this as a Pennsylvania bankruptcy attorney, and folks in other States have different laws and practices. But because cars depreciate like crazy, I don’t ever want a client to default on a car loan and wind up facing a big deficiency judgment. Car lenders are particularly aggressive when they need to repossess a car and then collect on a deficiency. If you reaffirm, and then later default, I guarantee that they will seek a deficiency!
In Pennsylvania, mortgage companies rarely seek deficiencies on residential mortgage loans after a sheriff’s sale. This is a common practice in other States, but for now in Pennsylvania, we virtually never see banks do this on residential mortgages. Be careful though–this could change. There’s no Pennsylvania law that says that they can’t.
So, for cars, are you allowed to “retain and pay”? An Allegheny County Judge ruled in a 2007 case that you indeed could. The case involved a person who had filed a bankruptcy, and who did not reaffirm his car loan. The car was repossessed soon after the bankruptcy case was over. The loan was completely current, and the only reason for the repossession was because of the failure to reaffirm. The Judge ruled that the repossession was not legal, because the loan account was still current.
Lastly, if you choose not to reaffirm on your car loan, then you can simply surrender your car after the bankruptcy case is over, and then enter into a new car loan with a different lender. Yes, you will be able to rebuild your credit, and fairly soon after the Chapter 7 is over, you may very well qualify for a new and better loan.
Judge Bohm and the Court’s Position on Reaffirming Loans
If you decide to reaffirm a mortgage or car loan, the Judge wants to know that you understand what you are choosing to do. The Judge does however deny a high percentage of reaffirmation requests. Why? Because she states that you don’t have to reaffirm a loan in order to keep the house or car in question.
One big difference however is if your bank offers you a lower interest rate or lower payment through the reaffirmation agreement. The Court will be much more likely to approve a reaffirmation agreement when the new loan terms are better.
And it never hurts to ask your mortgage company or bank to do just that. Some of them will never do it, but your lawyer should ask anyway.
If you have any comments, please let me know!