Reaffirmation of a car loan is necessary in a Chapter 7 bankruptcy in order to ensure that the lender cannot repossess the car after the bankruptcy case closes.
Prior to the enactment of the 2005 amendments to the Bankruptcy Code, a debtor could stave off repossession of a car so long as the payments remained current. The theory behind that was that the debtor was not in default if he continued to make the payments. This was procedure was given the nickname “ride-through.” Some of the federal Courts of Appeal held that a ride-through was permissible. Others rejected it. The Ninth Circuit Court of Appeals, whose decisions apply in California and other western states, held that a ride-through was permitted. (In re Parker, 9th Cir. 1998.)
In the 2005 amendment to the Code, Congress provided that if the debtor fails to reaffirm or redeem the debt, a lender may repossess the car if the contract papers include language stating that the borrower’s filing bankruptcy is an event of default. In 2009 the issue came up again before the Ninth Circuit, under the new amendment. The court held that the creditor could indeed repossess the car even if the debtor remained current post-bankruptcy, provided the contract contained such a clause. (In re Dumont, 9th Cir. 2009.)
Reaffirmation agreements involving debtors represented by an attorney become effective when they are filed with the court. If the debtor is not represented by an attorney and is instead proceeding pro se, a proposed reaffirmation agreement must go before the bankruptcy judge for approval. The Code provides that the judge can approve the reaffirmation agreement only if it finds that the reaffirmed debt will not present an undue hardship, and is in the best interests of the debtor. Under those circumstances, where there is no approved reaffirmation agreement, may the creditor repossess the vehicle after the case closes?
This scenario recently came before a bankruptcy court in Alaska (which is also within the Ninth Circuit). In that case, which was not an appellate case, the judge disapproved of the proposed reaffirmation agreement because its terms would have caused the debtor undue hardship. In the same decision, the judge also stated that the under the circumstances, where the debtor unsuccessfully attempted to reaffirm, the lender would not be able to repossess the vehicle if the debtor remained current in the payments. The judge also noted that the Ninth Circuit Court of Appeals had not yet addressed this issue. (In re Berni, Bkrtcy.D.Alaska 2013).
So generally speaking, the ride-through rule no longer applies. As a result, even if the post-bankruptcy payments are current, the debtor will not be able to stave off repossession by the lender unless the debtor has reaffirmed the debt or has unsuccessfully attempted to do so. It is important to remember that all of this depends on the wording in the contract papers. If there is no “ipso facto” clause stating that the borrower’s filing bankruptcy constitutes a default, then if the borrower remains current post-bankruptcy, the lender probably would not be able to repossess the vehicle regardless of whether or not there is an approved reaffirmation agreement in place.
If your situation involves these types of issues, and if keeping your vehicle is very important to you, then you definitely should have a lawyer sort out how all this would apply in your situation before you file bankruptcy.