You can almost always keep your house and car in a bankruptcy without signing a reaffirmation agreement. Although some creditors threaten to repossess property if a reaffirmation agreement is not sign, my experience is that they almost never do when the payments are kept current.
Some of my clients do not want to take any chances with their car being repossessed. This is not a concern with Arizona real estate because under state law a mortgage company does not have a right to foreclose when you are current on the payments. Unfortunately, the Bankruptcy Courts have ruled that a lender on a car loan can repossess even when payments are current if you do not sign a reaffirmation agreement. It is rare that they will repossess when you are current, but it has happened.
A reaffirmation agreement is a contract that causes the loan to survive the bankruptcy. The big disadvantage of the agreement for you is that if you find you can no longer make the payments the lender can repossess the property and then collect the balance owed when the property is sold for less than the amount owed.
The advantage of not reaffirming, but keeping the car and continuing to make payments, is that if you find that you cannot make the payments, the lender can only take the property back – they cannot sue you even when the property is sold for less than the amount owed.
In Arizona there is a way to deal with this dilemma that allows you to have the best of both options: keep the car, not have to worry about repossession, but not be bound by a reaffirmation agreement.
Here is my strategy for dealing with this. Because the bankruptcy code requires that when you sign a reaffirmation agreement the Court, or you lawyer, has to approve the agreement on the basis that the agreement does not current any undue hardship.
The Bankruptcy Judges will almost never approve the agreement when your budget shows that you might have trouble making the payments or when the debt on the property is a lot more than the property’s value. But what they will do is enter a Court order stating that you attempted to reaffirm, not approve the reaffirmation agreement, and enter an order prohibiting the lender from repossessing the property provided that you stay current on the payments.
So, instead of signing off on the reaffirmation agreement as my client’s attorney, I will have the agreement submitted to the Court without my signature. The Judge will often schedule a hearing to determine whether or not to approve the agreement. At the hearing I will let the Court know that you want to keep the property, that you are current on the payments, that I do not believe the agreement is in your best interests and ask the Judge to enter an order allowing you to keep the property provided you make the payments, and make a Court order prohibiting the lender from repossessing. So far this has worked every time.
The bottom line is that you don’t need to reaffirm but it makes sense to sign the agreement and then ask the Court to refuse to approve it.