Do I Need to Reaffirm my Car Loan if I File Chapter 7 Bankruptcy in Connecticut?

       In 2005 in an attempt to favor auto loan lenders Section 362 of  the bankruptcy code was amended to make redemption or reaffirmation of auto loans a necessary requirement for debtors filing Chapter 7 for those debtors that want to retain their cars. Suffice it to say redemption which means payment in full of the auto loan at time of filing is not a realistic option so the focus of this post is on the reaffirmation requirement. Before this amendment the preferred and common approach to auto loans for cars intended to be kept post-filing was the retain and pay approach. In order to discuss this approach I need to first make the distinction between the effect of the discharge of a secured debt versus an unsecured debt. It is relatively easy to understand the discharge of an unsecured debt like a credit card. Upon the successful completion of the Chapter 7 the debtor's obligation to pay this credit card debt is terminated. For a secured debt like a car loan it is not as simple to understand. It is true that the actual debt is discharged, but the security agreement survives the bankruptcy requiring the debtor to continue to pay the monthly payment in order to keep the car. If the debtor takes the retain and pay approach without reaffirmation they continue to pay, but can stop paying at any time and surrender the car without any deficiency due. This is clearly the preferred approach in most cases where debtors' budgets are tight if not negative at  the time of filing and the fact that cars generally after a few years depreciate quickly resulting in loan balances in excess of these cars' values. This is especially the case with debtors who have high interest rate car loans when they file bankruptcy which is quite common. Reaffirmation of an auto loan leaves the debtor in the same position prior to filing with the auto loan debt not discharged and reported on their credit report. In order to reaffirm under the current code the auto loan payment cannot impose an undue hardship on the debtor. In other words the debtor's budget must show they can afford it at time of filing and debtor's bankruptcy counsel must affirm this fact with the filing of the reaffirmation agreement for court approval. Herein lies the problem of this requirement as indicated above many debtors' budgets do not show they can afford their car payments not to mention the fact many of their cars are not worth what they owe. They're not eligible to reaffirm due to the code's hardship requirement. Also it is clearly not in their best interests anyways to reaffirm a debt on a car that is currently underwater. In Connecticut as well as other states throughout the country this placed debtors in a very difficult position since in almost all cases debtors at the time of filing do not want to surrender their cars that they need to get to work and live their lives. Despite the fact their budgets may show they may not be able to afford their auto loans they do what they have to do to keep their cars.
       I am pleased to tell Connecticut debtors that our legislature enacted a solution to the problem created by the 2005 amendment to Section 362 of the Bankruptcy Code which allows debtors to continue to use the preferred retain and pay approach and still keep their cars. In 2009  the Connecticut legislature repealed and replaced Section 36a-785 of the Connecticut General Statutes with a provision that specifically states the filing of bankruptcy in itself does not constitute a default under the terms of an auto loan security agreement. The practical effect of this new statute was that car loan lenders could not refuse to continue to receive loan payments from Chapter 7 debtors despite the fact they did not reaffirm their car loans. Therefore, the loans that are being paid are not in default and auto loan lenders are not able to take any action to repossess these vehicles. This change essentially restored the right to retain and pay without reaffirmation for Connecticut Chapter 7 debtors and was accepted by auto loan lenders once they were educated by debtors' attorneys like myself as to this new Connecticut statute. In conclusion, the answer to the question posed as the title to this post is no! Furthermore, when considering reaffirmation of a car loan where you may have equity in your car you need to review in depth with your attorney the advantages and disadvantages before going forward with reaffirmation.

Can I Keep My Car if I File Chapter 7 Bankruptcy in Connecticut?

                   Most of my Chapter 7 Bankruptcy clients own a car and one of the first questions they ask me is can they keep their car if they file bankruptcy.  In most cases the answer is yes whether they own their vehicles outright or they are secured by auto loans. Debtors in Connecticut are entitled to use either the Federal or Connecticut asset exemptions in Connecticut.  The Federal exemptions under the Bankruptcy Code which are the most common exemptions my clients use provide a motor vehicle exemption up to $3,675 of the car’s value which by itself may appear to pose a problem to some debtors who own their vehicles outright. This problem of excess value above the $3,675 figure is usually solved by application of the "wild card" exemption which provides an additional $1,225 plus up to $11,500 of the unused portion of the $22,975.00 federal homestead exemption. This automatically means that for all renters they have $16,400.00 to apply to their vehicle(s) and bank accounts with their household items, jewelry and retirement assets(if any) covered by other asset exemptions. Most homeowners who consult with me to file bankruptcy either have no or so little equity in their homes that there are sufficient exemptions available to them to allow them to keep their cars as well.

For those clients with car loans most vehicles are under secured and no exemptions are needed and if there is some equity there are more than enough exemptions to cover same. In most cases this holds true whether they rent or own their homes. For individual homeowners with equity in excess of $22,975 or joint homeowners in excess of $45,950 who wish to retain their homes they have to use the Connecticut exemptions which provides an exemption up to $75,000 for the equity in their homes. Unfortunately the motor vehicle exemption is only $3,500 with a wild card exemption of only $1,000. They are instances when faced with this situation and a client who owns a car with a value in excess of the $3,500 to $4,500 filing bankruptcy puts the car's equity at risk. When it's close I have had clients file and negotiate a buy out of the difference above the exemption with the trustee. With cars that have more significant value this may not be an option.

         

The second issue concerning the retention of your motor vehicle has to do with the reaffirmation of auto loans. In 2005 the Bankruptcy Code was amended in an attempt to remove what is known as the "ride through" or "retain and pay" option with regard to car loans in bankruptcy. Per the amended code your options were limited to surrendering  your vehicle or retaining via redemption(payoff) or reaffirmation as listed on a form entitled "Statement of Intention" to be filed with the court for service on your creditors with your Chapter 7 bankruptcy filing. I have yet to meet with a bankruptcy client who is in a position to redeem their vehicle. For those who want to retain their vehicles the issue of reaffirmation usually must be addressed. In simple terms when a reaffirmation agreement is signed by the debtor and lender it is filed with court and the auto loan debt is not discharged by the bankruptcy and is paid and reported on debtor's credit report as if no bankruptcy were filed. For auto loans other than those from credit unions the reaffirmation agreement form requires that the debtor's attorney to sign off that the reaffirmation agreement does not impose an undue hardship on the debtor. In most cases this is not possible due to the fact the secured debt exceeds the value of the vehicle and/or the debtors' current income and expenses. In recognition of this dilemma the Connecticut legislature in 2009 came to the rescue with a revision of CGS section 36a-785 clearly stating the filing of a Chapter 7 by itself does not constitute a default of an auto loan allowing a lender to repossess a secured vehicle. The practical effect of this revision was to take the teeth out of the 2005 code amendment and allow for the continuance of the “retain and pay” option without reaffirmation of car loans in Connecticut. This fact seems to have been acknowledged by all auto lenders who have been educated about this state statute by the bankruptcy attorneys in this state. Therefore, in practically all my cases my clients keep their cars with the debts discharged and have the option to continue to pay their car loans and keep their cars. If their loans become too difficult to pay in the future or their cars break down they can stop paying and let the lender take back their cars without any liability for the loan balance due. At this point this post is already longer than I intended and I will leave the issue of leased cars in bankruptcy which is less cut and dry for a future post to my blog.