Bankruptcy

Reaffirmation Agreements: ?Let Them Eat Steel!? (Part Two)

By Russell A. DeMott, Charleston Bankruptcy Lawyer

In part one, I discussed some recent Bankruptcy Law Network posts on reaffirmation agreements.  For part two, though, we’ll focus soley on the reality of a typical auto loan scenario.

Forget About the Law

“What?” you say.  “This site is all about the law!”  That’s true, but reality is more important.  The reality is that most debtors are upside down with their vehicles.  In car sales talk, that means they owe more than their vehicles are worth.

For example, say you owe $20,000 on your car, and your car is only worth only $16,000.  If your auto lender repossesses your car, it would be sold for around $10,000 at auction resulting in a $10,000 loss for the lender.  Talk about a bear trap!  Why would any auto lender ever repossess your vehicle if you are making timely payments?  The vast majority wouldn’t because if they did, they would guarantee themselves a loss of $10,000 plus more for repossession fees and storage costs.  And remember, they can’t come after you to collect this deficiency balance because you discharged it in your Chapter 7 bankruptcy case.

But if you reaffirm the debt with the lender, you’re still liable for that auto loan.  If you later can’t afford the vehicle, and it’s repossessed or voluntarily turned in, you’ll still be responsible for repaying that $10,000 loss even though you completed your bankruptcy case and got a discharge on all your other debts.  Now hopefully you see why Mark Buckley gets so much heartburn over reaffirmation agreements.  And many lawyers, including me, share his views on this issue.

But let’s say you’ve got an unusually stubborn auto lender–sometimes that happens, after all.  The lender insists that you reaffirm, or it will repossess the car.  So what!  You are upside down on the car anyway.  Let them have this one back, and go get another one!  The world is awash in used cars.  Yours isn’t the only one.  “But I’ve got bad credit now,” you say.  Again, I say, “so what!”  You’ll get a car loan.  You might need to buy a cheaper car, and you’ll pay higher interest, but you can get a decent car for $5,000 to $10,000.  Drive it for a couple of years and then get something nicer.

This means that in most situations YOU have the power, not the lender.  You need to understand this.  The reality is that you can tell the lender to “Eat Steel!”  Think long and hard before you sign a reaffirmation agreement.  Talk to your attorney about your options before taking this drastic step.

Russell A. DeMott is a Charleston, South Carolina bankruptcy attorney who helps people file Chapter 7 and Chapter 13 bankruptcy.

Full post as published by Bankruptcy Law Network on February 27, 2010 (boomark / email).