Reaffirmation of Vehicle Loans in Chapter 7 Cases

On July 15, 2011 the highest Court in Maryland clarified the issue of whether a lender who has granted a loan for the purchase of a vehicle under a vehicle retail installment contract may repossess a vehicle solely because the borrower filed bankruptcy. In most cases, the answer is “yes.”

In the matter of Ford Motor Credit Company, LLC v. Roberson, 420 Md. 649 (Md. 2011), the debtor, Patricia Roberson, filed a previous Chapter 7 bankruptcy case. While that case was pending she did not execute a reaffirmation agreement to reinstate her car loan with Ford. After she received her discharge, Ford repossessed her car. Ms. Roberson was current on her car payments at the time of repossession, and the vehicle was properly titled and insured. Ford argued that it had the right to repossess the vehicle under the “Ipso Facto” clause of her finance agreement. The Ipso Facto clause stated that the filing of bankruptcy, in and of itself, was a breach of the finance agreement. Ford argued that the purpose of the Ipso Facto clause is to prevent “insecurity” that is caused by the filing of Chapter 7 bankruptcy. This “insecurity” exists because a bankruptcy discharge removes Ford’s ability to sue a borrower if he or she defaults on the car loan after bankruptcy. The way to cure this “insecurity” would have been for Ms. Roberson to have executed a reaffirmation agreement during pendency the Chapter 7 case because it would reinstate Ms. Roberson’s personal liability for the loan (subject to Court approval). Ms. Roberson argued that since she was current on her payments and was otherwise in compliance with the loan agreement, there was no basis for Ford to deem the loan to be in default.

The Court of Appeals of Maryland decided the matter in favor of Ford. In doing so, the Court looked to three statutes that govern lending and borrowing in the State of Maryland. These statutes are commonly referred to as “CLEC”, “OPEC”, and “RISA”. There was no dispute that the finance agreement at issue was governed by CLEC. The Court also looked at an older case called Biggus v. Ford Motor Credit Co., 328 Md. 188, 613 A.2d 986 (Md. 1991). In Biggus the Court of Appeals acknowledged that CLEC was a newer statute that RISA. The Court determined that there were certain situations that were not covered by CLEC, and wherever there were gaps in the CLEC rules, the rules under RISA would fill in the blanks. After the Biggus case was decided, the Maryland Legislature grew concerned that this “gap filling” would cause a flood of new lawsuits in order to determine when RISA rules would apply to contracts that were otherwise governed by CLEC. The Legislature thought this uncertainty would cause lenders to believe that they needed set money aside to cover legal fees and costs associated with this unknown litigation. As a result, it was feared that many lending costs would spike and lenders would simply stop writing auto loans in Maryland. Therefore, new provisions, including the one containing the Ipso Facto clause at issue were enacted.

The Court then compared language in CLEC (and OPEC) with the language in RISA, regarding what a lender is prohibited to do in the face of “uncertainty.” The Court noted that RISA prohibits both acceleration of all payments due under the loan and repossession of the vehicle, while CLEC only prohibits acceleration of the payments due under the loan. The Court determined that the Legislature must have intentionally excluded repossession from the prohibitions under CLEC and, as a result, it was permitted.

Boiled down to its essence, the Roberson decision stands for a proposition that most car loans must be reaffirmed in Chapter 7 cases in order to nullify the lender’s right to repossess the vehicle at any time, regardless of whether payments have been made and the owner is otherwise in compliance with the loan terms. This does not mean all reaffirmation agreements should be signed. Consultation with a bankruptcy lawyer is key in determining whether it is in your best interest to sign a reaffirmation agreement.

Seth W. Diamond is an attorney at Laura Margulies & Associates, LLC. in Rockville, Maryland. His firm represents individuals and companies in bankruptcy and litigation matters in Maryland and the District of Columbia. For more information about bankruptcy and the services offered by his firm, please feel free to visit the firm's website. If you would like to schedule an appointment to discuss bankruptcy with an attorney, call 301-816-1600, or click here.