Car manufacturers lobbied Congress to make it harder for debtors to keep their cars through bankruptcy. In Chapter 7, that was accomplished by eliminating the “ipso facto” clause, which said that merely filing bankruptcy was not a breach of the purchase contract. The expectation was that debtors would reaffirm their car loans, giving the car lender the right to sue for a deficiency judgment against the debtor should the debtor later default, rather than risk losing the car.

Reaffirmations would diminish the debtor’s discharge and lock the debtor into paying for a car that might well be worth substantially less than the loan balance.

Debtor’s attorneys were expected to certify that repaying a car loan would not create a hardship for the debtor; if the attorney wouldn’t/couldn’t so certify, the reaffirmation agreement needed to be approved by the bankruptcy judge after a hearing. Most bankruptcy judges were less than enthusiastic about this new role.

Debtor’s lawyers have wondered about the continued existence of “pay and drive”, the practice of car lenders allowing the debtor to keep the car for so long as the payments were current and the car insured. Putting debtors to the test of reaffirming a badly upside down car or returning it to the lender might not be such a great idea for the auto industry if debtors shucked their greatly depreciated vehicles.

At last weekend’s banrkuptcy seminar, judges and lawyers reported that in practice, only Ford Motor company is routinely repoing vehicles where the post bankruptcy debtor has not reafffirmed the debt but remains current on payments and has insurance. All the rest of the lender community has apparently figured out that they do not want to “eat steel” and take possession of a flood of cars worth less than what is owed from debtors willing to continue paying for them.

Perhaps, a bit of common sense has inserted itself in the world of BAPCPA.

Cathy

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To a distressing extent, people in dire financial straits still worry that escaping overwhelming debt via bankruptcy will destroy their credit score. This article in Smart Money shows why filing bankruptcy can improve the debtor’s credit score and offers tips to get the most improvement following bankruptcy.

While I resist the growing importance of credit scores in non financial parts of our lives and the obsession among consumers with credit scores rather than “assets and liabilities”, it’s nice to have confirmed my contention that a discharged debtor is objectively a better credit risk after bankruptcy than he was before.

Cathy Moran
Bankruptcy in Brief

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Perhaps the second most frequent question would-be clients ask me is whether the fact that they filed bankruptcy will be 1) in the paper, 2) disclosed to their employer, or 3) discovered by their family or friends. Those who aren’t living the American dream of upward mobility and financial security seem to think that’s a matter for shame.

A couple of objective observations are in order: a university study of some years ago found that one in seven American families would be better off if they would file bankruptcy. Second, between 2001 and 2005, over 8 million American families filed bankruptcy. Chances are very good that serveral of the families around my petrified client have filed bankruptcy, unknownst to them.

The study about being “better off” resonates particularly with me, as I see individuals struggling to pay credit card debt, where the interest has tripled when a payment was late, while at the same time, they have no emergency cash reserves, no retirement savings, and no health insurance. While their choices are noble, they aren’t wise. These people live on the financial edge so that the credit card companies get their minimum payment.

I tell my questioner that bankruptcy is a matter of public record, so anyone who wants to find out who has filed can do so. But, I ask, have you recently read the news of individual bankruptcy filings? Such is not the fare of papers where I practice and they begin to realize how insignificant the fear of exposure is next to the finanical realities of their situation.

The human creature is pretty amazing that it will live with the constant stress of overwhelming indebtedness rather than risk that others learn of its pain.

Cathy Moran