Many of my Lexington bankruptcy clients have serious debt problems but have managed to keep the payments current on their mortgages and car loans. Setting these debts as a first priority for payment is smart and often makes it easier to keep homes and cars. But the rules for dealing with these kinds of loans have become a little more complicated in recent years.
As we discussed in a previous post, Chapter 7 generally does not wipe out mortgages or car loans. The lender continues to have a lien on the home or car, so you must continue to pay the debt in order to retain the collateral.
With real estate mortgages, which are secured by land and structures permanently affixed to land, you may keep the property simply by continuing to pay the mortgage as the loan terms require. You must be current with the payments, or at least close enough that you can catch up very quickly. But you do not have to take any additional step to assure the creditor you will continue paying. We say the mortgage “rides through” the bankruptcy.
For most of the 25-plus years I have been filing cases, debtors in Columbia and Lexington could treat car loans the same way. Our South Carolina bankruptcy court expressly allowed the retain-and-maintain option. This meant that the debtor could keep the car simply by maintaining the payments. However, in 2005, when Congress passed the sweeping bankruptcy law changes known as BAPCPA (“Bankruptcy Abuse Prevention and Consumer Protection Act“), this changed.
Under current law, in order to retain cars or other personal (moveable) property that is under lien, you must reaffirm the loan. If you fail to reaffirm, the creditor can hold you in default simply because you filed bankruptcy. Your car could be repossessed even if you are current with the payments.
Reaffirming means signing a written agreement to remain personally responsible for the debt. If the car is later repossessed, or if it is destroyed and the insurance fails to cover the loan, the creditor may pursue you for the unpaid portion of the debt. Although you will have discharged other debts, the car loan remains the same as if you had never filed bankruptcy.
The bankruptcy court reviews each reaffirmation agreement to determine whether the debtor can afford the payments. If your budget indicates you cannot make the payments and you cannot explain how you will pay them, the court may reject the reaffirmation. This does not mean the creditor can automatically repossess. If you have done everything you can to reaffirm, but the court says no, the creditor cannot declare a default as long as you remain current with the payments.
The advice of a skilled bankruptcy lawyer is the key to making the right choices on ride-through and reaffirmation. With that assistance, most Chapter 7 debtors who can afford to pay for their cars and homes — once they do not have to pay other debts — are able to do keep them.