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Ride Thru, Reaffirmation Agreements and the Ninth Circuit Court of Appeals

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The Ninth Circuit Court of Appeals, has decided the issue of whether a reaffirmation agreement is necessary in bankruptcy in relation to personal property.

Prior to the 2005 changes to the bankruptcy code that resulted in what is now known as “bapcpa”, a debtor could “retain and pay” or “ride through” on it’s car loan as long as he stayed current on the car payment.

The creditor with the security interest in the car was left without any legal obligation to sue on, should the car be surrendered or repossessed and a deficiency balance existed.

No reaffirmation agreement was typically necessary. (read more about what a reaffirmation agreement is here)

Not signing a reaffirmation agreement was good for the debtor because he obtained the best of both worlds as a result. i.e. Keep the car and make the payment, but not be liable on any deficiency balance should he not be able to afford the car down the road and after surrender.

Many attorneys felt as a result, that advising a client to sign a reaffirmation agreement with the creditor on the car loan inside of the bankruptcy case was malpractice. Especially if the car was upside down, i.e. it was worth much less then what was owed on it.

If the reaffirmation was signed unnecessarily and the debtor lost the car down the road he would then owe what sometimes amounted to a large deficiency balance nullifying some of the “fresh start” benefit gained in the bankruptcy case.

The Ninth Circuit in the above mentioned case seems to have eliminated the choice.

No more “retain and pay”. (Read the Decision here)

At least as far as federal law is concerned, it appears that debtors will have to choose at the outset of the case whether to:

1. sign a reaffirmation agreement 2. surrender the car 3. or find a way to “redeem” or pay a lump sum for the car