Reaffirming Car Loans in Massachusetts Bankruptcy

In 2005, Congress passed the “Bankruptcy Abuse Prevention Act” otherwise known by the acronym “BAPCPA”. Under BAPCPA, Massachusetts debtors have three options allowed by federal law in regard to their car loans. The first is to surrender their automobile. Returning the vehicle to the lender relieves the debtor of any further responsibility for the debt after the debtor’s discharge issues. For many people this is not an option. Most people need their vehicle for transportation to and from work, and to manage normal household errands. A second allowed option is to reaffirm the car loan. Reaffirming a loan requires signing a document called a Reaffirmation Agreement. Reaffirmation Agreements make the debtor permanently liable for the car loan. The bankruptcy discharge will offer no protection from collection on the reaffirmed loan. Therefore, if payments become unmanageable, or the debtor chooses no longer to pay the loan for any other reason, the lender may repossess the vehicle and then sue for the balance still owed. Because Reaffirmation Agreements impose a burden on the debtor’s fresh start in bankruptcy they require approval of the Court. A third option is to redeem the vehicle, which is to pay the lender the value of the collateral. This option is rarely realistic.

Another option, called retain and pay, would allow debtors to keep the car and simply keep making their payments. If the payments remain current, then the debtor can keep the car without the onerous liability afforded by the Reaffirmation Agreement. Under this choice, if the debtor fell behind in payments on the car loan and the vehicle was repossessed, the debtor would not be personally liable for any deficiency. Retain and pay is not an option recognized in the First Circuit of which Massachusetts is a part. If retain and pay is claimed, a creditor may challege it.

Fortunately, Massachusetts residents may have a trump card to help with this conundrum. Massachusetts General Laws, Chapter 255B, Section 20A seemingly prohibits repossession of motor vehicles for a non-monetary default. For Massachusetts debtors current in their payments, this law may provide an avenue to keep their vehicle by keeping their payments current without reaffirming the loan. While a creditor might obtain relief from the bankruptcy stay to repossess such a vehicle, state law would then seem to bar that repossession. Coupled with the Massachusetts Consumer Protection Statute, Massachusetts General Laws Chapter 93A, this statute can be a tremendous asset to the debtor. The debtor’s argument under the statute is the vehicle is worth the same today whether or not a bankruptcy case was filed. The filing did not diminish the vehicle’s value, the payments are current and therefore no repossession can occur.