Some positive changes to the bankruptcy code will go into effect on January 2, 2023. Auto lenders will no longer be permitted to require debtors to “reaffirm” their auto loans.
In the past, the bankruptcy code declared that auto lenders could repossess automobiles if the debtor filed bankruptcy, unless the debtor executed a “reaffirmation.” A reaffirmation is a formal document renewing the debtor’s legal duty to pay the loan.
Once you have executed a reaffirmation, you are liable for the debt even if you give the car back, or the car breaks down and becomes inoperable. If you give the car back, the lender will sell the car at an auction and charge you for whatever is left on the loan.
In actual practice, most lenders did not repossess vehicles just because the customer filed bankruptcy. They were happy to keep collecting the payments (and interest) as long as the loan was current. The only lender I know of that routinely insisted on reaffirmations was Ford. My practice in the past was to telephone the bankruptcy department of the auto lender and ask if they were agreeable to the customer retaining the vehicle without reaffirming. After they said “yes,” I would send a fax or email confirming the agreement.
Reaffirmations had to be approved by a judge to be effective. Judges often declined to approve them. If the judge declined to approve the reaffirmation, the lender could not repossess because the debtor all he or she could to honor the obligation.
This rather convoluted series of rules will change January 1, 2023. Lenders will no longer have the right to repossess just because the customer filed bankruptcy, as long as the loan is current, and the vehicle insured. This is known as a “ride-through,” or “retain-and-pay.”
The loan will likely not appear on your credit report, which means that being late on the payments from time to time will not hurt your credit score. In addition, if the vehicle becomes inoperable or you vountarily surrender it, you will owe nothing on the loan. This is a significant improvement to the bankruptcy, and eliminates the hassle of having to deal with each lender individually.
It also seems fair. Someone should not have to worry about losing a car if they are current on the loan payments.