NEW PROTECTION FOR DEBTORS WITH VEHICLE LOANS
Recent California law changes have given all Debtors who file bankruptcy in California the option to retain and pay on their vehicle loans in a Chapter 7 bankruptcy. Prior to the changes in the law that took effect in 2023, when you filed for bankruptcy protection you had to reaffirm your auto loan and only had the option to retain and pay if the car lender offered it as an option. The option to retain and pay allows Debtors to continue to pay on their vehicle without signing a reaffirmation agreement and not having the risk of having their vehicle repossessed as long as they remain current.
Prior to the new California legislative changes taking effect a Debtor in a bankruptcy had to reaffirm their car loan debt or face the possible risk of the vehicle being repossessed by the car lender even if they were current. The filing of a bankruptcy prior to these changes was treated as a default on the contract which could be used as a basis for accelerating the maturity of any part of the amount due or repossessing the vehicle. The new law makes void and unenforceable any contract provision that makes the filing of a bankruptcy by a buyer or individual liable a default under the contract. The law changes Section 2983.3 of the California Civil Code of the Automobile Sales Finance Act.
The new law makes clear that the filing of a bankruptcy by any person liable on the contract of a motor vehicle does not constitute a default in the buyer’s performance of his obligation. As a result, the lender cannot accelerate the maturity of the loan or repossesses the vehicle.
HOW DOES RETAIN AND PAY HELP DEBTOR’S?
Requiring vehicle loans to be reaffirmed made the Debtor personally liable on the vehicle contract after the bankruptcy. If after the bankruptcy the Debtor fell behind on his payments and the vehicle was repossessed, then they may have been subject to a deficiency balance (difference between what the vehicle was sold for and what they owed on the vehicle). This would lead to a situation where the Debtor could not file for Chapter 7 bankruptcy for another 8 years and had a deficiency balance owed to the car lender that they could be pursued for. This scenario placed Debtors in precarious situations, especially where they had high vehicle loan payments that they could barely afford and were uncertain if they could continue to keep up with the payments in the future.
The option to retain and pay without reaffirming allows a Debtor to not remain personally liable for the vehicle loan while allowing them to retain the vehicle as long as they keep current on the payments and other contract terms. When a Debtor opts to retain and pay and the car is repossessed later due to nonpayment, the lender cannot pursue them for any deficiency balance. This provides a significant protection to the Debtor in case their financial situation changes after the bankruptcy and they cannot continue to make the payments on the car/vehicle.
WHAT ARE THE DRAWBACKS TO NOT REAFFIRMING?
When a debt is discharged in bankruptcy and you are no longer liable for the debt, the creditor will not report the debt payments on your credit report. Similarly, when you retain and pay, you are discharging your personal liability on the vehicle loan and the creditor will not report the car payments on your credit report. Payments on vehicle loans that are reported on your credit report can help build your credit score.
Although retain and pay does not help with credit score, there are other options for rebuilding your credit score after bankruptcy including secured credit cards, and making sure that any credit obtained in the future is paid on time.
Debtors continue to have the option to reaffirm if they wish, but in most cases it may not be advisable. In most cases the option to retain and pay offers significantly more benefits than the benefit of having payments reported on your credit report through reaffirming.