If you want to keep your financed car in Chapter 7 bankruptcy, your lender might require you to enter into a new contract in a process known as “reaffirming” the debt. In this article, you’ll learn about the pros and cons of reaffirming a car loan.
Keep in mind that there’s more to keeping a car in bankruptcy than deciding whether to reaffirm a loan. If you’re unaware of the details, start by learning more about protecting your property from creditors in bankruptcy.
When you file for Chapter 7 bankruptcy, your liability on all dischargeable debts gets extinguished. For instance, your bankruptcy case wipes out credit card contracts, utility obligations, personal loans, and even car loans. But unlike a standard credit card obligation or personal loan, your car lender likely required you to go one step further—to guarantee payment by agreeing to give back the car if you failed to pay as agreed.
The additional agreement creates a lien against the car. The lien remains until you pay off the car—even if you file for bankruptcy—and gives the lender the right to repossess it if you fall behind on payment (although you can release liens in bankruptcy in some instances). After your Chapter7 case, however, the lender won’t be about to sue you for the balance of the loan. So you must pay for the car—and other secured debts, such as your mortgage—if you want to keep the property you put up as collateral.
Find out how to protect your house in bankruptcy.
Some car lenders will let you keep the car after your Chapter 7 bankruptcy without entering into a reaffirmation agreement if you continue making the payment. Because a contract won’t be in force, the lender won’t be able to sue you for a deficiency; for instance, if, after an accident, the repairs exceed the value of the car and you don’t recover enough from insurance to pay off your car loan. But the risk you face is that the lender can take back the vehicle—even if you’re current on your payments.
Car lenders that don’t want to lose the ability to sue you for the deficiency will require you to sign a “reaffirmation agreement” for you to keep your car after the Chapter 7 bankruptcy.
A reaffirmation agreement is a new contract between you and your car lender that reinstates your liability to pay the loan again. Some bankruptcy courts don’t like debtors to reaffirm loans because it requires them to give up the benefit of your bankruptcy discharge on the reaffirmed loan. Learn more about protecting secured property with a Chapter 7 reaffirmation agreement.
Debtors don’t automatically qualify for a reaffirmation agreement, and it must be entered into and filed while your bankruptcy case is active. You’ll be eligible if you can demonstrate that you have sufficient funds available in your budget to cover the payment without burdening yourself and your family.
So who determines eligibility? If you have a bankruptcy lawyer, your attorney can sign the reaffirmation agreement attesting to the fact that you can afford the payment. Otherwise, you’ll attend a hearing before a bankruptcy judge who will review your paperwork to ensure its compliance with the rules. You can take a look at a standard reaffirmation agreement if you’d like more details, such as the information you must include in the agreement.
Here are some reasons it might make sense to reaffirm your loan.
Since a bankruptcy wipes out the car loan but not the lender’s security interest in the car, your car lender won’t report your post-bankruptcy payments to any credit reporting agencies. So timely payments won’t help you establish a good credit history after bankruptcy. If you reaffirm the loan, your lender will continue reporting payments.
If you can negotiate better terms with the lender, it could in your best interest to reaffirm. Since a reaffirmation agreement is a new contract, you and the lender can agree to change the terms of the original agreement (however, most are on the same terms). A car lender might reduce the principal balance or interest rate to make a reaffirmation more attractive.
If you don’t sign a reaffirmation agreement, the lender can repossess your car after your case closes and the automatic stay lifts. Some car lenders are known to repossess the car immediately, even if you are current on payments. Other policies differ, but in all cases, you should expect a repossession 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.
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, suppose that 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 the car loan, then the lender can also sue you for the $2,000 deficiency balance in addition to repossessing the car.
Some car lenders will automatically repossess your car if you don’t reaffirm. However, car lenders also know that they’ll make more by accepting your payment than they would to repossess the vehicle and sell it at an auction. So many lenders will continue to take your payment and let you keep the car even if you don’t reaffirm the debt. A bankruptcy lawyer will be in the best position to explain your options and whether you’ll qualify.