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lien in bankruptcy cars

Liens in Bankruptcy: The Ultimate Guide, Explained

Liens in Bankruptcy: The Ultimate Guide, Explained

Liens in bankruptcy typically survive and don’t get affected by the discharge. However, there are exceptions where the lien can be reduced or even eliminated. I try to break these down in simple terms that are easy to grasp. But don’t be fooled: bankruptcy is more complicated than you think. Get a consultation with an attorney, and make sure you check out my list of 12 crucial tips to do or avoid before filing bankruptcy.

What is a Lien in Bankruptcy?

A lien is a security interest of a debt that encumbers a thing owned by the borrower until the debt is paid. One common example is a car and the car loan. The borrower who “owns” a car can’t just sell the car outright. He has to pay the debt secured by the lien against the car first. Then, once the debt is paid, the lien is satisfied and removed.

Section 101(37) of the Bankruptcy Code defines “lien” as:

charge against or interest in property to secure payment of a debt or performance of an obligation.

How does bankruptcy affect a lien? The General Rule

The general rule for liens in bankruptcy (and there are exceptions) is that bankruptcy doesn’t affect a lien at all. If a debt is secured by a lien and collateral, if you wish to keep the asset, then that debt will survive the bankruptcy. You don’t get a free house or car in bankruptcy. Here, let me put that in a fancy quote because it is so important:

You don’t get a free house or car in bankruptcy.

– Attorney Hale Andrew Antico

There is a reason this is emphasized so strongly. For some reason — be it wishful thinking or confusion because the lender stopped sending statements or something else — people sometimes stop paying for a house or car. This is a mistake that can result in foreclosure or repo.

house lien in bankruptcy
Not really representative of a lien in bankruptcy, but it shows money and houses so pretend there’s a chain encumbering them.

If you wish to keep the thing with a lien in bankruptcy (e.g.: your house), then you must continue to making regular payments on the loan or loans that goes with it. With that general principle out of the way, there are some specific exceptions or applications.

Chapter 7 bankruptcy and Liens

How does bankruptcy affect a lien in Chapter 7?

Chapter 7 bankruptcy is the simpler bankruptcy. You don’t normally pay unsecured debts back here. But how does bankruptcy affect a lien in a Chapter 7? The short answer: liens don’t go anywhere. If you started a Chapter 7 with a debt secured by a lien, you will most likely end the Chapter 7 with a lien. Nothing changes. Let’s look at a few different things that come up.

Vehicles in Chapter 7: You don’t get a free car

Repeat after me: In Chapter 7 bankruptcy, you don’t get a free car. If you are financing a vehicle, if you want to keep the vehicle, you must keep paying the loan. No matter what happens, you must keep current and paying for the car (or truck or RV or quad or other secured vehicle) if you want to keep it.

If your bank turns off your online access, you must keep current and paying for the car if you want to keep it. If your bank stops sending you statements or coupons, you must keep current and paying for the car if you want to keep it. If aliens abduct your Aunt Nana, you must keep current and paying for the car if you want to keep it.

You must be wondering why I’m spending three paragraphs repeating something that seems quite basic. You know, the concept that you must keep current and paying for a vehicle if you want to keep it. This is because no matter how obvious, no matter how many times this is repeated, people still somehow stop paying for their vehicle because they read on some message board on Google Esq. that they get a free car in bankruptcy.

But that’s false. You know why? Because there’s a lien on the car. And it remains. Why?

Because you don’t get a free car in Chapter 7 bankruptcy.

lien in bankruptcy car
Lien in bankruptcy doesn’t go anywhere with regard to a car in Chapter 7 because you don’t get a free car in bankruptcy.

Reaffirmation Agreements in Chapter 7

Definition of Reaffirmation Agreement

A reaffirmation agreement is an agreement where you … reaffirm a debt. This has the legal effect of you promising to owe a debt after the bankruptcy, no matter what. I think we can all agree that vowing to be liable on a debt regardless of what happens after a bankruptcy is the opposite of what bankruptcy is supposed to be.

Why on earth would someone say, for example, yes, please, make me owe my mortgage balance even if I ever lose my house to foreclosure? You wouldn’t. Because that’s crazy. That’s what a reaffirmation agreement is: a contract where you make yourself owe a debt after the bankruptcy, regardless of what surprises the future throws at you.

That is crazy. Why would I ever sign a reaffirmation agreement?

Good question. You would never voluntarily promise to undo the bankruptcy for a debt on which you are trying to avoid personal liability. Again, it defeats the purpose of bankruptcy to say yes, I’d like to owe this debt after bankruptcy.

Bankruptcy is intended to get you out of debt. Reaffirmation agreements are intended to get you back into debt.

But you just told me I’ll owe the car debt after bankruptcy no matter what.

Not quite. The example above is just talking about payments for a car that you intend to keep. If you want to keep the car, pay for it on time. What we’re talking about now is the possibility you lose the car or house or RV after the bankruptcy.

Let’s say a year after the bankruptcy is done, an asteroid hits your employer and you lose your job and the can’t pay for the house or car. They repo or foreclose and you lose the thing, right? Right.

But if you signed a reaffirmation agreement, you not only lost the house or car, but you also owe for the contract for the house or car you no longer have. Why? Because you signed a reaffirmation agreement. Can we agree that’s a bad outcome?

Holy cow, that’s terrible. Why would I ever sign a reaffirmation agreement?

You wouldn’t voluntarily sign a reaffirmation agreement unless you had to. And for vehicles, if you want to keep the collateral, you need to stay current on payments and you need to sign a reaffirmation agreement if they send one to you. For mortgages, you don’t generally need to or want to sign one. Any lender that tells you you needed one during your bankruptcy is mistaken, lying, or evil. Probably just mistaken.

Note: the law is changing in California in 2023 to bring back bankruptcy ride-through. SB1099 will make it no longer a default on a car loan if you don’t sign a reaffirmation agreement for a vehicle.

522f Lien Avoidance in Chapter 7: Judgment Liens

Recap of the rule: liens in Chapter 7

The rule for liens and lien avoidance in Chapter 7 bankruptcy is that the lien doesn’t go anywhere and you don’t get a free house or car in Chapter 7. If you started Chapter 7 with a lien on your car or a second mortgage on your house, you will likely end the bankruptcy with one, as there usually is no lien avoidance in Chapter 7. There can be one exception to this, and you have to qualify for it, contract for it, and yes, usually pay for it: judgment liens.

Possible Exception: What is a Judgement Lien

A judgment lien is when someone sues you, and as a result of the lawsuit, the judge rules against you. As a result, there is a now judgment against you. One way to collect on a judgment is a judgment lien against real estate or property you own or have an interest in. In California, the judgment lien cannot foreclose on you and take your house. However, it can sit there and grow with interest until you sell, refinance, transfer, or otherwise try to change the title. Then, it needs to get paid in full.

Oh no. What is a Judgment Lien Avoidance in Bankruptcy?

A judgment lien avoidance is where, in some cases, you can remove, or avoid, the judgment lien in bankruptcy… even Chapter 7 bankruptcy. Yes, it’s possible in Chapter 7 bankruptcy to avoid a judgment lien. However, it is not possible in every case, and doesn’t happen automatically. It’s extra work, and unless you contract for (and pay extra for) this extra work, the judgment lien avoidance won’t happen. Plus, the calculations around your home equity and lien amounts have to be right to qualify for it.

What are the factors to qualify for Judgment Lien Avoidance?

To qualify for lien avoidance in bankruptcy, we turn to Section 522(f) of the Bankruptcy Code, which says, in part: “the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled.”

So, for judgment lien avoidance, you need to determine if the lien impairs an exemption. At its core, this is a simple math problem. Here, in the Central District of California, the form we use spells it out pretty clearly, as you can see below.

522f judgment lien avoidance calculations
522f judgment lien avoidance calculations from CDCA form F 4003-2.1.Avoid.Lien.RP.Motion

The factors are pretty self-explanatory:

  • Value of Collateral: that’s what the house is worth
  • First lien: this is usually the primary deed of trust, or first mortgage
  • Amount of Debtor’s exemption: the amount of the exemption Debtor is entitled to

Lien Avoidance Formula: Take the value of the collateral, then subtract the debtor’s liens which cannot be avoided, and then subtract the exemption amount. That’s the amount that remains to pay judgment liens.

Still, this can be confusing. Read on!

522(F) Judgment Lien Avoidance Calculator

Below is a judgment lien avoidance calculator to help with the math of determining whether a judgment lien is impairing an exemption per 11 USC 522(f). You can only avoid the lien up to the amount it is impairing the exemption. If there is only partial impairment, there can only be partial judgment lien avoidance.

Timing of amounts used for lien exemption

If you learned of a judgment lien now but had an old bankruptcy where you didn’t avoid it, you may still be able to avoid the old judgment lien using the old bankruptcy. But exemptions change over time. Which home value and exemptions amount do you use?

Chapter 13 Bankruptcy and Liens

Section 506: Lienstripping a junior mortgage, mortgage cramdown, or avoiding a second mortgage lien

What Does the lienstripping law say?

There are really a few sections to focus on. First, section 506(d) of the Bankruptcy Code states, generally:

To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void

Making a lien void is a very good thing, and in Chapter 13 bankruptcy this can sometimes be done. The problem is it can’t be done all the time; the circumstances — and the math — have to be just right. Sometimes Sections 506(a) and 1322(b)(2) come into play in helping define what is secured.

The 9th Circuit BAP clarified when this can be done in In re Lam, 211 BR 36 (9th Cir BAP, 1997). It was in this major ruling when the Bankruptcy Appellate Panel ruled, “The Nobelman decision holding that section 1322(b)(2) bars a chapter 13 plan from modifying the rights of holders of claims, secured only by the debtor’s principal residence, does not apply to holders of totally unsecured claims.” Id. at 41.

liens in bankruptcy house
Liens in bankruptcy regarding a house, this time with a chain encumbering it in rich symbolism.

So, the key language in Lam is “totally unsecured.” Unlike avoiding a lien under 522(f) which can allow partial removal of a judgment lien, avoiding a consensual lien like a deed of trust or mortgage cannot be partially secured. “…a one dollar difference in property value could have a profound effect on a secured creditor’s rights.” Lam at 41. So the evidence for property value is key, and this can be where all the fight is.

Lam Lienstrip Examples

Let’s say Debtor has a home valued at $200,000 with a first mortgage of $225,000 and a second mortgage with a balance of $50,000. Because the second isn’t “touching” the secured house, it is totally unsecured and can be avoided with a lien-strip in a Chapter 13 bankruptcy. However, if that same property were valued at $230,000, then there’s about $5,000 of secured status for the junior mortgage. That’s enough to make it a secured claim, and then, because it’s not wholly unsecured, it cannot be avoided or lienstripped.

I made a handy calculator where you can test out the above lien stripping examples yourself, and of course, your own numbers to see if it’s totally unsecured and qualifies in the Ninth Circuit for lien avoidance under Lam.

If you are in the Los Angeles, Ventura, or Orange County, contact me and let’s go over your options.

Section 522(f) and Judgment Liens in Chapter 13 bankruptcy

Judgment liens, where for example, a credit card won in court against you and then liened your home, can be avoided in Chapter 13 if they impair an exemption. While there can be a huge benefit to removing a judgment lien in Chapter 13, it also wouldn’t be necessary if it’s a 100% plan. In other words, if you’re paying all your unsecured debt back, turning a secured debt to an unsecured one wouldn’t provide a whole lot of benefit but would increase legal fees. For a discussion – and a judgment lien calculator — see above in the Chapter 7 judgment lien section.

What is Cramdown in Bankruptcy (Chapter 13)?

Chapter 13 bankruptcy cramdown is where we can reduce the secured debt of a car to the fair market value of the vehicle. In other words, in Chapter 13, we can “cram down” the loan balance to what the car is worth if the loan was incurred over 910 days ago. The remaining debt gets paid through the Chapter 13 plan at the same percentage as the unsecured debt, potentially saving thousands of dollars on a vehicle loan.

A bankruptcy cram down example would be if a vehicle loan was $30,000, and the car was only worth $18,000. In Chapter 13, it’s possible to only pay $18,000 for the car loan, and treat the rest of the car debt like credit card debt. Again, this wouldn’t make a lot of sense if it’s a 100% plan or there is some doubt you’ll be able to finish the bankruptcy with the car “in the bankruptcy” because if the case is dismissed, you’re now late on the loan which was being partially paid through the case, which is now ended. You’ll need to ensure you can get to the finish line if you take this route. However, the benefit can be valuable.

Penrod and Negative Equity

Is The Negative Equity PMSI?

Penrod is not just a funny name, but a Ninth Circuit case. The Penrod case addresses trade-ins which had the old loan rolled into the new one, where the old loan is now called negative equity. We just learned that we can cram down a vehicle loan if the balance is more than the vehicle’s value if the debt was incurred over 910 days prior to filing. There is a way to remove the traded-in loan from the current loan, even if this happened in the 910 days before filing.

Marlene Penrod traded in an Explorer and bought (and financed) a 2005 Ford Taurus. She rolled about $7,000 of her old Explorer loan into the new Taurus financing. Less than 910 days later, she filed Chapter 13 bankruptcy. In the case, she bifurcate, or split, the Taurus loan into two, and said she’d only pay the new Focus price in full as Purchase Money Security Interest (PMSI). The negative equity from the Explorer wasn’t purchase money, and therefore wouldn’t be secured.

The new finance company objected, and the Ninth Circuit Court of Appeals agreed with Marlene Penrod when it wrote, “In sum, we find that a creditor does not have a purchase money security interest in the “negative equity” of a vehicle traded in during a new vehicle purchase.” In re Penrod, 611 F. 3d 1158 (9th Cir, 2010).

Penrod and Gap Insurance and Extended Warranties

Not only can negative equity can be removed from a vehicle loan in a Chapter 13 in the Ninth Circuit, other bankruptcy courts in the circuit have broadened this to other areas. For example, in Washington state, a bankruptcy court has held that Penrod also applies to removing gap insurance and an extended warranty. This is because, like negative equity, they are not part of the purchase money security interest. In re Jones, 583 BR 749 (WDWA, 2018).

In Jones, the court ruled:

Accordingly, this Court finds the Option Contracts are not part of the “price” of the Vehicle secured by the PMSI. Like negative equity, the Option Contracts are not sufficiently related to the purchase of the Vehicle. Unlike other expenses listed in Official Comment 3, neither the purchase of optional gap insurance or maintenance contracts are akin to sales tax and license fees, which are not optional but are required in order to obtain the vehicle.

Jones at 755.

It went on to write, “The Court concludes that Kitsap Credit Union’s purchase money security interest in the Vehicle does not secure sums advanced to pay for optional gap insurance and vehicle maintenance contracts.” Id. at 759.

Tax liens in Bankruptcy

Tax liens in bankruptcy generally don’t go anywhere. In Chapter 7, because they didn’t get paid, they survive the bankruptcy case. A tax lien in bankruptcy (Chapter 13) will have to be paid as a secured debt to avoid it and remove it. This can create feasibility problems in your Chapter 13 bankruptcy case, depending on the size of tax lien and secured debt. As always, discuss with a bankruptcy lawyer.

In sum

Liens in bankruptcy are generally not removed, and you don’t get a free car or house. Sometimes liens can be reduced, stripped, or avoided, if the math works out right in various situations. There is a lot more flexibility in Chapter 13 bankruptcy to reduce or even eliminate liens. Arrange a consultation with an experienced bankruptcy attorney in your area to learn your particular options. Thanks for reading.

Chicago v Fulton automatic stay and turnover cases are not just about cars

After Chicago v Fulton: Not Only Cars

After Chicago v Fulton: Not Only Cars

A Survey of Fulton Rulings and a Weakened Automatic Stay

Intro: What is a Fulton ruling?

When Chicago v Fulton (In re Fulton), 141 S Ct. 585 (Sup Ct, 2021) was first decided by the Supreme Court, there was a consensus among bankruptcy attorneys that the erosion of the automatic stay with regard to turnover was only about cars. That is, Fulton was a narrow ruling that was only about impounded vehicles seized prepetition, and wouldn’t really impact or weaken the automatic stay otherwise. Two years on, that turns out not to be the case.

What “Exercise Control” Meant Before Chicago v. Fulton

Prior to Fulton, many courts around the United States held that the filing of a bankruptcy petition compelled a party to return to debtor property taken for the purposes of collections prepetition. This forced return was under the power of the automatic stay of 11 USC 362, specifically section (a)(3). That portion of the statute “stays” or prohibits “any act … to exercise control over property of the estate.” Prior to 2021, it was common for courts to hold that property taken prepetition but held postpetition was “exercising control” of it and in violation of the stay.

Locally here in the Ninth Circuit, an example of a pre-Fulton exercise control case was In re Del Mission Ltd., 98 F.3d 1147 (9th Cir, 1996). There, the appellate court held, “we conclude that the State’s knowing retention of the disputed taxes violated the automatic stay.” Id. at 1152. After Fulton, Del Mission is no longer good law.

A Chicago v Fulton battle over automatic stay and turnover
A Chicago v Fulton battle over automatic stay and turnover

What SCOTUS Ruled in Chicago v. Fulton

Fulton reversed the law of many courts, including here in the Ninth Circuit. The Supreme Court held that “mere retention of estate property after the filing of a bankruptcy petition does not violate § 362(a)(3) of the Bankruptcy Code.” Id. at 592. It ruled that it to be a stay violation, it would take “affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” Merely holding onto something doesn’t do that.

Deep Dive on the Automatic Stay

What is a post-Fulton case or Fulton ruling

The Chicago v Fulton case was about the city of Chicago seizing and impounding vehicles prepetition for motor vehicle infractions and to collect fines, then refusing to turn over the vehicle upon the bankruptcy filing per 362(a)(3). Post-Fulton, courts are now finding that any property, not just a car, seized prepetition can be “merely retained” without finding a violation of the automatic stay. Two years later, this is a quick survey to see how courts are ruling on this issue now.

First Circuit

Milk. In re Vaqueria Las Martas, 638 BR 482 (1st Cir BAP, 2022). Not a typical automatic stay and turnover case, this Chapter 12 involves a loan for a couple of million dollars secured by thousands of gallons of milk. Fulton came into the picture because of the reference in it to filing an adversary proceeding for turnover under Section 542. Interestingly, at page 499, the 1st Circuit BAP found that the Supreme Court in Fulton “decided the issue narrowly,” but it was referring to the turnover process, not the Fulton ruling itself.

Bank accounts – “beyond the status quo” In re Educational Technical College, Case No. 21-02392 (EAG) (Bankr Ct, Puerto Rico, 2022). Here, the bankruptcy court found that the allegations against creditor rise above the level set in Fulton and Stuart (discussed below) when it misled debtor, took contradictory positions, used vexatious litigation tactics, and delayed things unnecessarily.

Second Circuit

No cases found yet.

Third Circuit

Bank accounts. In re Margavitch, Case No. 5:19-05353-MJC (Bankr Ct, MD Penn, 2021). Margavitch was one of the first turnover rulings on the issue to come out after Chicago v. Fulton was decided. It involved a pre-petition attachment lien, and the creditor took no action to withdraw it once the case was filed. The Court held, citing Fulton, that a stay violation requires an affirmative act that disrupts the status quo of estate property on the date the petition was filed. Further, the Margavitch court ruled, “passive maintenance of its valid pre-petition attachment lien in no way changed the status quo and therefore, did not constitute a violation of §362(a)(2).”

Bank accounts. In re Kipps, Case No. 5:19-01662-MJC, (Bankr Ct, MD Penn, 2022). The same judge who decided Margavitch decides another bank account case, and reaches the same conclusion.

Fourth Circuit

No cases found yet.

Fifth Circuit

No cases found yet.

Sixth Circuit

No cases found yet.

Seventh Circuit

No cases found yet.

Eighth Circuit

No cases found yet.

Ninth Circuit

Bank accounts. Stuart vs City of Scottsdale (in re Stuart), 632 BR 531 (9th Cir BAP, 2021). Here, Bank of America froze three bank accounts of debtor before he filed bankruptcy. Upon filing, the bank refused to release the frozen funds. The Ninth Circuit BAP held, “Where a creditor has executed a prepetition writ of garnishment against a debtor’s bank account, it is under no affirmative obligation to release the funds and need only maintain the status quo.” Id. at 540. “Because the City immediately asked the state court to stay the case and did nothing to change the status quo that existed when Mr. Stuart filed his bankruptcy petition, it did not violate the automatic stay.” Id. at 544.

Entering a Court Order. In re Censo, 638 BR 416 (9th Cir BAP, 2022). The Ninth Circuit BAP goes one step further. In Censo, there was a pre-petition lien, and so this seems to be the normal fact pattern. What’s different here is that there was a summary judgment order regarding the lien that was granted postpetition. The 9th Cir BAP found that the order did not change the status quo: “Shellpoint’s lien existed as of the petition date, and the DC Order simply affirmed the validity of the existing lien. It did not affect KAH’s possession or control of the Property. The DC Order thus did not disturb the status quo and did not violate § 362(a)(3).” Id. at 425. The automatic stay provision of 362(a)(1) bars actions against debtor. In Censo, the BAP’s found the “automatic stay inapplicable to lawsuits initiated by the debtor, and a defendant in an action brought by the debtor may defend itself in that action without violating the automatic stay.” Id. at 424.

Court action taken in defense. In re Lee, Case No. 13-11850-gs (Bankr Ct, Nevada, 2022). Debtors reopened their fourth bankruptcy case, which was previously dismissed, to file lawsuits. In response, the creditor brought a motion, and the bankruptcy court ruled, citing Censo, that the automatic stay doesn’t apply to state court actions commenced by the debtors.

Withholding a passport. In re Bronson, Case No. 20-30704-thp11 (Bankr Ct Oregon, 2022). In this case, there were allegations that creditor withheld debtor’s passport to collect unpaid child support. The bankruptcy court addressed the issue as to whether a stay violation occurred regarding the passport, but found there was not enough factual evidence to make a ruling.

Tenth Circuit

No cases found yet.

Eleventh Circuit

Beyond the status quo: Car seized prepetition but then sold postpetition is a stay violation. In re Rakestraw, Case No. 22-40960-PWB, (Bankr Ct, ND Georgia, 2022). “Although a creditor’s retention of a vehicle repossessed prepetition does not violate the provisions of the automatic stay in 11 U.S.C. § 362(a)(3), the automatic stay in § 362(a)(4) prohibits the enforcement of a lien against property of the estate. Accordingly, the alleged postpetition sale of the Vehicle to enforce the lien violated the automatic stay.”

Summary of turnover cases after Chicago v Fulton

Post-Fulton rulings and jurisprudence are still on the thin side two years later. However, it is clear that the Chicago v Fulton holding applies far beyond motor vehicles. In fact, most rulings citing Fulton had nothing to do with cars and trucks.

If you know if a case that belongs on this list, please share it on the following form. Thank you.

    ride-through california bankruptcy

    Ride-Through Back in Calif Bankruptcy

    Ride-Through Back in California Bankruptcy

    Ride-through is back in California bankruptcy. This is big news for 2022. It restores the right of someone in bankruptcy to be free of personal liability on a car loan in the event of a future default. To be clear, you don’t get a free car in bankruptcy. But if you don’t reaffirm the car debt, and stop paying the car after the bankruptcy discharge resulting in a repo, you won’t owe the deficiency balance.

    The change is part of SB1099, a bill the governor recently signed into law. The new law includes other protections or exemptions, for people filing bankruptcy. The changes take effect on January 1, 2023. Caution: it is likely that this may be challenged by lenders or trustees in court, so rely on this new law at your own risk. More on that below.

    Meaning of Ride-Through Doctrine in Bankruptcy

    ride-through doctrine meaning
    Meaning of Ride-through doctrine: car loan goes thru without adding dirt

    The meaning of the ride-through doctrine in bankruptcy is this: a vehicle can go through Chapter 7 bankruptcy without the debtor being on the hook for the car loan in case of future default after the bankruptcy is done.

    In my ultimate guide on Chapter 7 bankruptcy, I use a car wash as a metaphor for the process as a simple way to explain it. While the bankruptcy carwash is intended to remove much dirt, the ride-through doctrine means that the car owner isn’t forced to add the new road tar to his vehicle when it comes out the other side.

    You’d think that it would be common sense that all debts that existed at the time the debtor files bankruptcy would be discharged in the successful case. With credit cards, that’s certainly true (in most cases). However, a secured debt like that for a car or a house is treated differently. If you want to keep the car, you must stay current on the payments for life of the car loan.

    If, after the bankruptcy, the debtor and car owner loses his or her job and they need to turn in the car or have it get repossessed, what happens with the balance of the car loan? With the ride-through doctrine, the “old” bankruptcy reaches into the future and eliminates the new leftover debt. This is huge, as it can be thousands of dollars for something which was completely unplanned or unforeseen.

    2005-2022: Congress & BAPCPA End Ride-through

    It wasn’t always this way. During the dark years of 2005 through 2022, the ride-through doctrine was dead all throughout the nation. This is because back in 2005, Congress passed major bankruptcy reform called BAPCPA. As part of the sweeping changes, in a huge favor to big banks, Congress ended ride-through for all the people in the land.

    In its place, Congress compelled debtors seeking a new start by filing bankruptcy to sign reaffirmation agreements if they wanted to keep their cars. A reaffirmation agreement is where a debtor (you guessed it) reaffirms their debt in a bankruptcy.

    This means that the person signing the contract is promising to owe the debt and undo the bankruptcy with regard to it. Instead of discharging a debt, a reaffirmation is promising to owe the debt, no matter what. Promising to owe debt is bad, and the opposite of the goal of a successful bankruptcy. Millions of people seeking to be released from bondage to debt were forced to sign contracts owing it, or face losing their car anyway. These were dark times, indeed.

    2023: California restores Ride-Through in Bankruptcy

    But California changed that. In September 2022, a new law was completed which becomes effective in 2023, As part of the wide-ranging changes, California restored ride-through in bankruptcy. With Calif bankruptcy ride-through, failing to sign the reaffirmation agreement isn’t considered a default.

    The pertinent “ride-through” bankruptcy part from the new CA law:

    (2) Neither the act of filing a petition commencing a case for bankruptcy under Title 11 of the United States Code by the borrower or other person liable on the loan nor the status of either of those persons as a debtor in bankruptcy constitutes a default in the performance of any of the borrower’s obligations under the loan, and neither may be used as a basis for accelerating the maturity of any part or all of the amount due under the loan or for repossessing the motor vehicle. A provision of a contract that states that the act of filing a petition commencing a case for bankruptcy under Title 11 of the United States Code by the buyer or other individual liable on the contract or the status of either of those persons as a debtor in bankruptcy is a default is void and unenforceable.

    There it is: a person using Title 11 (which is the Bankruptcy Code) cannot be said to be in default, and any contract that says a person is liable on their car loan in case of default is void and unenforceable. This means there is no more repossession for failure to reaffirm or refusal to sign a reaffirmation agreement. This is how, during 2005-2022, some car lenders repossessed vehicles even if the borrower was current on the loan. The infraction? Failing to sign a reaffirmation agreement. So now you ask: after 1/1/2023, do I have to reaffirm a car loan in California bankruptcy and stay personally liable on the debt? The answer appears to be, “no.”

    Preemption: Supremacy Clause, federal law, and California’s ride-through

    Can a state change, or carve out an exception, to federal law? It remains to be seen whether this portion of the law will be challenged by creditors and car lenders. The strongest argument to challenge California’s bankruptcy ride-through is the Constitution’s Supremacy Clause of Art VI, Sec 2. This would state that the federal bankruptcy laws of 11 USC 521(a)(2) and 11 USC 524 are “supreme” to and therefore preempts California state law, and by applying the Supremacy Clause, the part of the state law which conflicts with federal law is void.

    A rebuttal to this would be that California’s bankruptcy ride-through is not in direct conflict with the Bankruptcy Code or of Article 1, Section 8 of the Constitution’s enumerated powers. California is not making laws about bankruptcy. Instead, the state can claim it is merely clarifying state law, as is its right. It can assert that a state has the right to define what is and is not a “default” in California, and a bankruptcy is not a default. Or whether or not car lienholders can repossess a vehicle, or make debtors owe the leftover deficiency balance on a debt after repo from an old bankruptcy case now closed. It remains to be seen if creditors or trustees act on this, and if so, which is more persuasive to a court of law.

    California’s Ride-Through is a New Day Dawning for Debtors

    new dawn of ride-through is back
    There is a new dawn: Ride-through is back in California

    The dark days of forced reaffirmation are behind us. No longer will a person seeking to become debt-free be coerced to sign a contract promising to owe on a potential future default. No more will hopeful Californians be saddled with thousands of dollars of debt after completing their bankruptcy, unable to file again for a number of years. Never again will people finishing a bankruptcy lose their car even though they were current on payments.

    A new dawn is emerging in California. A radiant era where people filing bankruptcy won’t have to worry about having an old debt survive and burden them as a future liability. A glorious future where someone can seek a new start without compulsion, and have the freedom of a clear conscience, free of worry, and without having old debt burden them.

    Yes, ride-through is back in California bankruptcy!

    Chapter 7 reaffirmation agreement

    Chapter 7 Reaffirmation Agreement

    Chapter 7 Reaffirmation Agreement

    What is a reaffirmation agreement in Chapter 7

    A Chapter 7 reaffirmation agreement is where the evil creditor is trying to get you to owe money after the bankruptcy is over. This is of course a bad thing. But there’s one problem: in some cases, you have to sign the reaffirmation agreement. Note: one advantage of Chapter 13 bankruptcy is no need to reaffirm debts.

    2022 Update: Ride-through is back in California bankruptcy, which significantly impacts the requirement to sign a reaffirmation agreement. This is due to the passage of SB 1099, which has a number of changes in California law to help debtors filing bankruptcy.

    What does it mean to reaffirm a debt?

    To reaffirm a debt is to agree with the lender that you’ll continue owing a debt. You’re basically saying, “I’m good for it.” You’re giving the creditor the power to maybe take things from you and sue you if you ever break the agreement.

    Chapter 7 reaffirmation agreement
    Chapter 7 reaffirmation agreement is a bad idea, but sometimes necessary.

    For years prior to 2005, creditors approached people who filing Chapter 7 bankruptcy with “opportunities” to continue owing the debt. Sometimes, the lender would have a representative approach the debtor at the 341(a) Meeting of Creditors and pressure them to sign. This is, of course, because creditors are, in general heartless and evil.

    Chapter 7 Bankruptcy gets folks out of debt. Reaffirmation agreements stick people with debt. Smart Los Angeles bankruptcy attorneys would just tell their clients not to sign a representation agreement. Unfortunately, people without a bankruptcy lawyer would be intimidated or threatened into signing reaffirmation agreements even though they weren’t necessary, even for cars.

    BAPCPA Changed Reaffirmation Agreements in Chapter 7

    Luckily, to protect debtors from creditors, who are, again, mostly lacking a soul, Congress passed bankruptcy reform in 2005. These changes included Chapter 7 reaffirmation agreements. Now, if someone is financing a car they want to keep, they must sign a bankruptcy Reaffirmation Agreement. Thanks, Congress!

    When To Expect a Bankruptcy Reaffirmation Agreement

    On one of the many many bankruptcy forms you want a Los Angeles bankruptcy attorney to complete for you — the Statement of Intentions — the debtor has to… state… what their… intentions… are with regard to secured debts. A secured debt is one that involves collateral, usually something you’re financing (typically a house or a car). So the form gives people a chance to say what they’re going to do with the collateral. Simplifying, the choices are to keep it or give it back. If you want to keep it, you can expect the lender to send you a reaffirmation agreement. Not because it helps you. But because it gives them an insurance policy against you to whack you with in the future.

    But I need to keep my car in bankruptcy

    Los Angeles bankruptcy filers need a car, and most times if they already have one they want to keep it. Of course you need to keep your car in bankruptcy. If you want to keep a car with no equity in a bankruptcy, you need to do two things: 1) make your payments on time; and 2) complete, sign and return the bankruptcy reaffirmation agreement to the creditor if they send one.

    The Danger about Reaffirmation Agreements

    Beware: if you sign a bankruptcy reaffirmation agreement, and the judge approves it, and then you break it, you will not only lose the collateral, but owe the lender. This means the debt can come back to bite you where you owe thousands or even a lot more months or years into the future.

    Reaffirmation Agreements Are Evil

    So with regard to cars, if you’re going to sign a reaffirmation agreement in Chapter 7, you want to be sure that you can afford the car all the way to payoff and pink slip.

    Risk of not signing the reaffirmation agreement

    Remember the rule: if you want to keep a car that has no equity, you need to stay current on payments and sign the reaffirmation agreement. Why? Because you said you would on your Statement of Intention. And you must follow through on that if they send one.

    But if you don’t do what you said you’d do on the Statement of Intention, you shift the power to the car company. If you don’t sign the Chapter 7 reaffirmation agreement, the car finance company can repossess the vehicle, even if you’re current on payments.

    So What Should I Do about the Reaffirmation Agreement

    Should you reaffirm your debt on the car loan or not? Heck if I know. This is just a website chock full of bankruptcy information, and doesn’t give legal advice. If you need legal advice, retain a Los Angeles bankruptcy lawyer. I happen to know a pretty darn good one (the “best bankruptcy lawyer” oh I don’t know but possibly the best bankruptcy lawyer for you).

    Conveniently, I put a form right next to this so you can contact Los Angeles bankruptcy attorney Hale Antico for your bankruptcy. Note: if you have already filed bankruptcy and have a Chapter 7 reaffirmation agreement, we don’t give advice. That’s just for clients who retained us to file their case.

    I do hope, however, that you find all the bankruptcy information I put on this lawyer website helpful. It really is my hope to demystify the scary unknown that is bankruptcy. Consequently, if it’s really something that would benefit you, you’ll hopefully see that it’s not a mystery but a tool that, when used properly, can be very effective and life-changing, for the better.

      Reaffirmation Agreements and Mortgages

      We haven’t even gotten yet to topic of reaffirmation agreements and mortgages. That is, quite simply, when your mortgage company sends you a reaffirmation agreement in Chapter 7. The law is different with regard to mortgages. The Statement of Intentions, where you again, state your intentions, has a box that lets you keep your house without reaffirming the debt. You have an affirmative duty to act on the intention you stated. And staying current on your mortgage while retaining the property is an option for a house, not a car. This concept is called “ride-through” and went away for cars with BAPCPA in 2005. It still exists for homes. You don’t need to reaffirm a house or give them to right to foreclose on it. Conversely, with cars, that’s exactly what happens.

      Mortgage Reaffirmation Example

      Let’s say you currently have a home valued at $300,000 and the mortgage has a balance of $250,000. You figure you love this house, it has equity, and you will never move and you want to reaffirm your mortgage debt. You sign a reaffirmation agreement in Chapter 7. Your Chapter 7 case finishes. Years go by.

      Oh no! The 2008 mortgage crisis happened again. Your home just lost half its value and you lost your job. It’s now worth $150,000 and you can’t afford the payments.

      If you stop paying, walk away, and let them foreclose on you, they get the house. But guess what they also get, nay, already have. That old Reaffirmation Agreement. They get to use that, even decades later, and go after you for the leftover on the mortgage loan you promised to pay. That can be a debt of well over $100,000 you still owe, and the old bankruptcy doesn’t help you. Why? Because you reaffirmed a mortgage.

      So Why Would You Want to Reaffirm a Mortgage Debt?

      Everyone can agree that even the possibility of owing tens of thousands of dollars at some point after bankruptcy is terrible. Yet, mortgage companies send their own customers these agreements. Why? Because they’re soulless ghouls. In the Central District of California, where this Los Angeles bankruptcy lawyer practices, no judge will approve a mortgage reaffirmation agreement in Chapter 7. Consumer bankruptcy attorneys want to protect their clients, and one way to do that is to not let them sign a Chapter 7 reaffirmation agreement for a mortgage that could end up haunting them twenty years in the future.

      The Postbankruptcy Mortgage Scam

      We’ve established that no sane person that understands what’s at stake would knowingly sign a mortgage reaffirmation agreement in Chapter 7. A bankruptcy attorney wouldn’t want their client to sign one. A judge won’t approve one in Los Angeles bankruptcy court. What can go wrong?

      What happens is, years after the bankruptcy, your mortgage company will tell you that they can’t / won’t perform some service for you. Why? You’re the customer and are paying your mortgage every month! They’ll say, “gee, remember that bankruptcy you filed? We sent you a reaffirmation agreement and your bankruptcy attorney didn’t let you sign it.” That is, because a decent bankruptcy lawyer protected you from them, they now turn around and deny you service, credit reporting, a refi, or some other perk. And it’s all the fault of your bankruptcy attorney, they say. The future you is outraged. “I can’t get a refi because the bankruptcy lawyer wouldn’t let me reaffirm my mortgage, which no judge would ever approve.” The present you understands because you read the example in the yellow box above, but the future you gets spun.

      Why would your mortgage company reject you, deny you some perk, or not report your on-time payments on your future credit report? Why would they punish you because you refused to let them have a hammer to hit you on the head with for a $100,000 debt in the future? Because they’re heartless callous monsters that are looking for a reason to punish you and turn you against the bankruptcy lawyer who protected you from them.

      They didn’t send me a Chapter 7 reaffirmation agreement

      In the Central District of California, it’s not a bad thing if you didn’t get a reaffirmation agreement in Chapter 7. Remember what it is: it’s basically a Motion to Make Debtor Owe a Debt in the Future sent to you by your car or mortgage lender. If they send you one for a car you intend to keep, you need to complete it. But if they don’t, hallelujah. You just got a ride-through. There is no bankruptcy court in the Los Angeles area that requires a debtor to string his own noose if he’s not presented one.

      If you haven't filed bankruptcy yet, contact us now!