Ride-through is Still Alive, With a Twist

Before the advent of BAPCPA (2005), Chapter 7 debtors in the Ninth Circuit (which includes California) did not have to reaffirm a car loan in order to keep the car. As long as the debtor was current on payments, the debtor could keep the car, even if the installment contract stated that bankruptcy was an event of default. Things are different under BAPCPA, however. One of the sweeping changes made by BAPCPA was to require debtors to require debtors to reaffirm if they wish to keep a car.

Almost all car installment purchase agreements provide that bankruptcy is an event of default, thus allowing the creditor to repossess the car. Under prior law, these “ipso facto” (by the very fact) provisions had no effect. However, BAPCPA allows these provisions to have effect if the Debtor fails to either (1) timely file a statement of intention, or (2) timely fulfill that statement of intention. What this means is that if the debtor fails to timely file the statement of intention or follow through on the statement of intention, arguably, the creditor can repossess the car, even if the debtor is current.

This presents a significant conundrum often to debtors who are current on their car payments. The effect of reaffirmation is harsh. If you reaffirm, you probably can’t discharge the debt in a subsequent bankruptcy, even if your car blows up or you lose your job and can’t make the payments.

A recent case, however, indicates that the “ride-through” is still alive, if the debtor does everything he is supposed to do and the court declines to approve the reaffirmation agreement. The case is In re Moustafi, — B.R. —-, 2007 WL 1592965 (Bkrtcy.D.Ariz.,2007). In that case, the debtor timely filed the statement of intention and timely signed a reaffirmation agreement. The court declined to approve the reaffirmation agreement, because it was not in the debtor’s best interest. Then the court stated that because the debtor had done everything that was required, 11 U.S.C. Sec. 521(d) does not allow the ipso facto clause to be valid. If the ipso facto clause is not valid, then there is no default and the creditor cannot repossess the car.