Sticking with our recent theme in blog entries, we decide to touch on reaffirmation agreements this week. Debtors who file a Chapter 7 bankruptcy in Arizona, and owe money on their house or car, are virtually certain to run across one or more of them. Leaving homes for another day, here is a quick rundown on vehicle reaffirmation agreements.

First, lenders want you to sign them and have them approved by the Judge. That should give you some pause right there. Rarely do creditors do anything that they think is going to benefit you. A creditor who has a lien on your vehicle wants you to sign a reaffirmation agreement because it gives them the ability to sue you personally if you default on payments in the future. In the old days, a debtor used to be able to just keep paying for the vehicle. If for some reason they couldn’t keep up the payments the might lose the car, but the creditor could not sue for the deficiency (the difference between what was owed on the loan and the amount they were able to sell the car for after they repossessed it, plus fees, storage etc. etc.).

Recent changes to the bankruptcy code and a recent case in the Ninth Circuit have made it more clear that if the Debtor does not in good faith attempt to reaffirm the debt, the bank can take the vehicle. In other words, “ride through” was thought to no longer be available. These changes emboldened creditors and they increasingly demanded that debtors agree to reaffirm the debt and assume liability in the event of a future default.

In Arizona, however, several judges have begun to take a much closer look at these agreements. While somewhat technical and convoluted to explain, the position these judges often take goes like this: 1. The Debtor has tried in good faith to reaffirm the debt, they signed the agreement, showed up for a hearing, remained current on their car payments after the bankruptcy filing, BUT . . . 2. I find that the approval of the reaffirmation agreement would be an undue hardship on the debtor because (a. the interest rate is to high, b. the debtor is upside down on the vehicle, c. making the payments does not look in the best interest of the debtor given their income and expenses, d. the creditor didn’t reduce the interest rate or the principal or extend the term. . . ) You get the idea. Then the Judge often enters an order DENYING the reaffirmation agreement, while at the same time also entering an order that prevents the creditor from repossessing the vehicle AS LONG AS THE DEBTOR STAYS CURRENT. If they do not stay current, the creditor can repossess the car, but the debtor does not have the personal liability for the deficiency that is likely to arise after the creditor sells the vehicle. In essence, many of these judges have found a way to give effect to “ride through” once again.

Most clients prefer this option. They get to keep the car, make the regular payments and go home. However, in some cases it is actually a good thing for the court to approve the reaffirmation agreement. For example, some creditors are starting to get the message and will offer principal reductions, or interest rate reductions or both to entice buyers to sign the reaffirmation agreements, but more importantly to them, to convince the Judge to approve it. If the deal is advantageous enough, then it may make sense to ask the Judge to approve the agreement so the debtor can take advantage of this new bargain struck with the creditor.

But for now, for most of our clients, the hope is that the Court denies the agreement but orders the creditor not to repossess the car provided the debtor stays current.  Strange, I know.

If you are considering bankruptcy, come see us for a free consultation. You can get more information on filing bankruptcy in Arizona at