Chapter 7 bankruptcy makes the debtor (you) no longer liable for dischargeable debts. A Chapter 7 wipes out credit card, medical, utility, and even car loan debt. If you no longer want your vehicle, you can surrender the vehicle with no penalty, and the loan and any deficiency will be wiped out after bankruptcy.
But what happens if you want to keep your car, but you still owe some money? You may redeem the property by paying the fair market value or you may be able to “reaffirm the loan” and continue making your car payments as if you never filed bankruptcy. Today’s post will discuss “reaffirmation agreements” and look at the pros and cons of entering into a reaffirmation agreement with your car loan lender.
What is a reaffirmation agreement?
Many lenders will require you to enter into a reaffirmation agreement if you intend to keep the vehicle. If you do not reaffirm, they can repossess the vehicle. Reaffirmation is the process where you agree to pay the debt by writing a new contract with the lender and submit it to the bankruptcy court for approval. Usually, the new contract is the same terms as your original contract, meaning your interest rate, payment amount, and length are the same. You will want to look over this carefully to check if the payment due dates are the same or the grace period has been shortened.
When you reaffirm your car loan, you agree that you will still owe a debt after the bankruptcy ends. You essentially agree that if you fail to make payments, the lender may repossess the vehicle, sell it, and sue you for any money you owe, as if you never filed bankruptcy.
Do I automatically get to reaffirm my car loan if I want to keep the vehicle?
No, usually you must be current on your payments and there are several parties that will need to agree to the reaffirmation agreement. Typically, your bankruptcy attorney will handle requesting a reaffirmation agreement with your car loan lender. The attorney will review the agreement and advise you if it is in your best interest to sign it. If it is, you and the creditor will sign the reaffirmation and submit it to the bankruptcy court for approval. After submitting the reaffirmation agreement, you will have 60 days to change your mind and can surrender the car. See 11 USC 524(c)(4)(alternative bar date is day of discharge, whichever is later)
Should I Enter into a Reaffirmation Agreement?
This answer depends on your individual situation and your bankruptcy attorney can guide you through your options. Advantages to reaffirming the loan include being able to keep the vehicle if the lender insists on a reaffirmation agreement, the lender can report positive payment history to your credit report, and you will not need to come up with a lump sum payment to keep the vehicle.
Some downsides to reaffirmation are that you are again personally responsible for any amount owed. If something happens and you are unable to pay, the lender can take action against you. Here are some questions to consider in helping you decide if you should reaffirm your car loan.
Do I really need this vehicle?
Most likely this answer is yes, but if this is for a second vehicle consider our next question.
Can I replace my vehicle with one that costs less?
Nothing is stopping you from shopping around for a different vehicle. It may be better for you to surrender your current vehicle and enter into a new loan or pay cash for a new vehicle. We see this when someone is upside down on their loan and the vehicle is worth significantly less than what they owe. This should be carefully considered with your attorney and take into account the interest rate and payments of any new loan you are considering.
Can I really afford my current car payment?
Many of your debts will be wiped out after Chapter 7 and you will only have your car loan (if you reaffirm) and regular bills to pay. However, if you have non-dischargeable debts such as child support or tax debt you will need to consider those payments as well as the car payment after bankruptcy.
When considering if you want to reaffirm your car loan, you must weigh the costs of keeping the vehicle and your ability to stay current on the loan. This is an important discussion to have with your bankruptcy attorney. Our attorneys will be able to advise you if reaffirming your loan would be a good choice in your situation.