Confused After A Reaffirmation Hearing?

The process of reaffirming a loan - most often a loan secured by a vehicle - can be one of the most confusing aspects of Chapter 7 bankruptcy. This article will go through the possible outcomes following a reaffirmation hearing and explain what each means. But first, let’s do a quick reaffirmation recap!

When someone reaffirms a loan, the practical effect of the reaffirmation is that the loan is not discharged. In other words, you’ll continue to be personally liable on the debt as though the bankruptcy itself never happened. 

Since that can significantly impact a filer’s ability to actually get and make the most out of their fresh start, reaffirmations for personal property (including cars) have to be either certified by the debtor’s attorney, or approved by the bankruptcy court. Most consumer bankruptcy attorneys only certify reaffirmations if the value of the vehicle is greater than the balance left on the loan.

If you don’t have a lawyer helping you in your Chapter 7 case (or if your lawyer won’t certify your reaffirmation agreement), the bankruptcy court has to make a decision based on what’s in your best interest. Most courts do this by holding a hearing on the reaffirmation agreement. 

What happens at a reaffirmation hearing

While each bankruptcy court judge has their own spin on how they handle their reaffirmation hearings, they often include a conversation between the judge and the person in bankruptcy asking for the reaffirmation to be approved. Then, one of three things happens: 

1. The court approves the reaffirmation agreement

2. The court denies the reaffirmation agreement

3. The court doesn’t rule on the reaffirmation agreement at all

Let’s take a look at each possible outcome and what it means for someone who is reaffirming their car loan. 

The court approves the reaffirmation agreement

Once the court has approved the reaffirmation agreement, the filer’s personal liability on the car loan survives the entry of the discharge. If all remaining payments on the loan are paid in full, then it’s essentially as though the bankruptcy never happened. If the person is unable to make the payments as they come due, the bank can repossess the car and - since the debt wasn’t discharged - sue for the unpaid loan balance. 

The same is true even if you no longer have the car due to an accident, for example. Since the bankruptcy discharge did not eliminate your personal liability, you have to pay off the car loan regardless of what happens to the car, or risk being sued for non-payment.

The court denies the reaffirmation agreement

Since the purpose of bankruptcy is to give the filer a fresh start, bankruptcy courts are often hesitant to approve reaffirmation agreements. This is especially true if the car is upside down (because the debtor owes more on the loan than the vehicle is worth). As a result, many reaffirmation agreements are not approved by the court. 

Does this mean you’ll lose your car? Not necessarily. 

Assume you’re current with your car payments and the vehicle is fully insured. Do you think the bank wants your car or your monthly payments? They want the money - of course - not the cost and hassle often associated with a repossession. So, as long as you keep making your payments - on time - and keep the car insured, chances are you’ll get to keep your car. Practically speaking, everything will still be the same as before. 

Just as before, if you stop making your payments, the bank will repossess the car and sell it to the highest bidder at auction. But - since the court didn’t approve the reaffirmation and the debt was discharged - that’s all they can do. No matter how much you still owe on your car loan, the bank cannot try to collect the debt from you personally. That would be a violation of the court’s discharge order. 

In a way, having the court deny approval of your reaffirmation agreement is the best of both worlds: You get to keep the car - as long as you pay for it - but you’re protected in case something goes wrong.

The court doesn’t rule on the reaffirmation agreement

Some judges are hesitant to rule on a reaffirmation agreement one way or the other. They have devised a few different strategies on how to handle this and typically take the time to explain what they’re doing during the hearing. Either way - if the reaffirmation agreement is not approved, your personal liability is discharged. And - just like when the court denies approval of the reaffirmation - most lenders will simply keep everything the same, as long as you make timely payments and keep the vehicle insured.

Does this mean I’ll have to keep paying on my car forever? 

No! Even though it may feel like you’re in some murky no-man's land when it comes to your car loan, you don’t have to pay on it indefinitely. The loan terms are the same they were before. As long as you make whatever number of payments were left on the loan when your case was filed, you’ll eventually pay off your car loan. 

If you’re not sure how many payments you had left , check out the information listed in box 2 of the Reaffirmation Agreement Coversheet (Official Form 427). That will tell you exactly how many payments you had left on the loan when your case was filed. Once done, you’ll get a free and clear title to the vehicle from the bank. Neither the bankruptcy, nor the judge’s decision about the reaffirmation agreement change that.