Before the new Bankruptcy Laws changed, most people throughout the United States were able to keep their vehicles when they filed a bankruptcy as long as they continued making their monthly car payments. A reaffirmation agreement was not necessary. But when the new Bankruptcy Laws went into effect on October 17, 2005, many car creditors took the position that they could now repossess your car if you filed a bankruptcy, even if you were up to date on the payments and wanted to keep it.
As it turned out, only a few lenders like Ford and Chrysler actually started repossessing vehicles after bankruptcy when the client still remained current and no reaffirmation agreement was signed. Why? Good question. If the debtor is current on his payments and ends up paying the car off, certainly the lender would receive more than they would at auction since at auction they only receive a firesale price which then must be reduced further with the costs of sale. Likewise, even if a debtor pays for some time after the Bankruptcy and then lets the car go back to the lender, the lender is still in a better off position since they at least received contract payments for a period of time in addition to the final sale proceeds.
So what is the motivation to repossess a vehicle where payments are current. Obviously its money. But how is repossession actually more profitable if the forgoing shows the lender is better off letting the debtor continue to make payments? One would think that “eating steel” is certainly not profitable. And its true. If all the vehicles were in fact repossessed and Ford and Chrysler ate all that steel, it would be the biggest bankruptcy loss ever seen by them. But they banked on the fact that all debtors and their attorneys would not make them eat steel. In fact, they put their money on FEAR, not eating steel. Yes, fear is very profitable. If the IRS can extract money from all of us voluntarily by simply instilling fear of what may happen, then certainly Ford and Chrysler might be able to use fear the same way. In essence, fear has now created REAFFIRMATION agreements for these two lenders where none would exist under the old laws. In turn, these agreements restore the BALANCE SHEETS of the lenders and create new stream of income.
BALANCE SHEETS: As soon as a bankruptcy is filed, the lenders’ financial books are impacted. If a bankruptcy discharge is entered, a loss shows on the books to the extent that loan receivable is written down to the fair market value of the vehicle. But if a reaffirmation agreement is properly executed and filed, the lenders can now immediately rewrite that loss back up the the full remaining contract balance. Its as if the Bankruptcy never existed. The debt is no longer discharged. Do the math and impact of thousands of dollars per car times thousands of cars, and the losses that are bypassed are huge! The new Bankruptcy Laws have created millions of dollars in new receivables for Ford and Chrysler which would have never existed in the past.
REAFFIRMATION: Prior to the new Bankruptcy Laws, most debtors were able to “ride through” the bankruptcy and maintain car payments without “fear” that the lender would repossess the vehicle. This was because most Courts held that the Lenders were not allowed to repossess a vehicle where payments were current. A Bankruptcy Code provision, 11 USC 365, basically said that the lender could not change or terminate the contract solely because the debtor filed for bankruptcy. But under the new Bankruptcy Laws, the Lenders have now interpreted certain provisions to allow repossession of the vehicle even when debtors are current on payments.
So Ford and Chrysler immediately started to repossess vehicles after the new laws went into effect despite the fact that debtors were current on their payments or even paying in advance. They seized this opportunity to set an example of what happens all across American if they dont get a reaffirmation agreement. Cars started getting repossessed. Debtors became angry. They accused their attorneys of lying to them. Eventually, most debtors started signing reaffirmation agreements out of fear of repossession if they had a Ford or Chrysler loan. And it worked!
The losses Ford and Chrysler initially took in repossessing vehicles that were current were soon well exceeded by all the new reaffirmation agreements which suddenly started coming into the doors where such agreements would have never existed under the old laws. While some attorneys sued these lenders on repossession, most attorneys simply looked the other way. Unfortunately, the few court decisions that were decided when some of the attorneys challenged the conduct were also not favorable to the debtors.
Presently, the majority of decisions allow ride through without reaffirmation agreement on real estate, on reaffirmation agreements denied by the court, on rescinded reaffirmation agreements, and on non-enforceable reaffirmation agreements.
Since the 9th circuit decided Dumont, Reaffirmation Agreements are necessary in most personal property security interests. Stay tuned, more on this blog to be published soon!
Written by Attorney Michael G. Doan– Mr. Doan practices on the cutting edge of bankruptcy law, and was the first attorney in the entire Southern District of California to file the very first Chapter 7 Bankruptcy and very first Chapter 13 Bankruptcy under the new Bankruptcy Laws which went into effect on October 17, 2005.
Quality Oceanside Bankruptcy Attorneys can be hard to find these days, but over at Doan Law Firm we take pride in the quality of our work and our clients are our number one priority.