Reaffirming a Car Loan in Bankruptcy

Learn about reaffirmation, including the pros and cons of reaffirming a car loan.

If you want to keep your car in a Chapter 7 bankruptcy, your car loan lender may require you to reaffirm the debt. Read on to learn more about reaffirmation, including the pros and cons of reaffirming a car loan.  

What Happens to Car Loans and Liens in Chapter 7 Bankruptcy?

When you file Chapter 7 bankruptcy your personal liability on all dischargeable debts is extinguished.  This includes your car loans.  However, your car lender still has a security interest (lien) on your car that is not affected by the bankruptcy.  What this means is that the lender can still repossess the car but it cannot sue you personally for the balance of the loan.  

Not surpisingly, car lenders are usually not happy about losing the ability to sue you for the deficiency. To avoid this, they may require you to sign a “reaffirmation agreement” in order for you to keep your car after the bankruptcy.  

What is a Reaffirmation Agreement?

A reaffirmation agreement is a new contract between you and your car lender that essentially makes you personally liable on the loan again.  You should not take the decision to reaffirm lightly as you will be giving up the benefit of your bankruptcy discharge on the reaffirmed loan.

Benefits of Reaffirming Your Car Loan

Reaffirming Helps to Rebuild Your Credit

Since a bankruptcy wipes out the car loan (but not the lender’s security interest in the car), your car lender will usually not report your post-bankruptcy payments to any credit reporting agencies.  This means that the timely payments you make will not help you in establishing a good credit history after bankruptcy.  If you reaffirm the loan, your lender will continue reporting your payments which will help you in establishing good credit.

Reaffirmed Loans May Have Better Terms

Since a reaffirmation agreement is a new contract, it can change the terms of your original agreement.  Sometimes, in order to make a reaffirmation more attractive, car lenders will reduce the principal balance or interest rate of your loan.  If you are able to negotiate better terms with the lender then it may be in your best interest to reaffirm. 

Reaffirmation Provides Certainty Against Repossession 

If you don’t sign a reaffirmation agreement, the lender usually has a right to repossess your car after the bankruptcy.  Some car lenders are known to repossess the car immediately even if you are current on payments.  Others have differing policies regarding repossession but will generally be quicker to take the car back if you miss a payment.  Reaffirming your car loan will provide certainty against the lender repossessing your car as long as you keep current with your payments.

Consequences of Reaffirming Your Car Loan

As we discussed, reaffirming your car loan has one very important consequence.  It makes you personally liable on the obligation again and leaves you on the hook for any future deficiencies.  

For example, let’s say you owe $10,000 on a car worth $8,000 and you stop making payments after the bankruptcy.  If the lender takes the car back and sells it for $8,000, it cannot sue you for the deficiency balance of $2,000 (the difference between the loan balance and what the lender got by selling the car) if you did not reaffirm.  However, if you reaffirm, then the lender can also sue you for this deficiency balance in addition to repossessing the car.

Should You Reaffirm Your Car Loan?

The answer to this question depends on your specific situation and how badly you need the car.  The prospect of being sued for a deficiency usually outweighs the benefits of reaffirming for most people.  But if you cannot afford to take a chance on whether the lender will repossess your car and you have negotiated reasonable reaffirmation terms or have a car worth significantly more than your loan balance, then it may be in your best interest to reaffirm your car loan. 

Will I Lose My Car If I Don’t Reaffirm?

Some car lenders will automatically repossess your car if you don’t reaffirm.  However, car lenders also know that they will usually make more money if you continue to make your payments and eventually pay off the loan than if they just repossessed the car and sold it at an auction.  So many lenders will still continue to accept your payments and let you keep the car even if you don’t reaffirm the debt.  However, to avoid any surprises, you should talk to your lender to see if this is an option.

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