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Reaffirming Your Vehicle in A Chapter 7

Reaffirming Car LoanWHAT'S A REAFFIRMATION AGREEMENT?

If you have loan on your vehicle and the lender is a lienholder on your vehicle's title, and you are thinking about filing bankruptcy, you need to know about reaffirmation agreements, and whether or not should sign one.

A reaffirmation agreement on your vehicle loan is a document that, when filed on time at the bankruptcy court, excludes that loan from the legal write-off—the "discharge"—that bankruptcy gives you for all or most of your debts. All debts are discharged, except special ones that the law does not allow to be discharged, like child support and recent income taxes. You don't have any choice about whether you can discharge those "nondischargeable" debts. But you do have a choice about whether to discharge your vehicle loan.

If WANT to stay liable on your vehicle loan, that is, you don't want to discharge that debt, then you WOULD sign a reaffirmation agreement. If you DON'T want to stay liable on your vehicle loan, you would NOT sign a reaffirmation agreement.

WHY WOULD YOU WANTTO STAY LIABLE ON YOUR VEHICLE LOAN IN A BANKRUPTCY CASE?

If you want to keep the vehicle and you owe money on it, and you stop making payments on it, the lender on that loan will have the right to repossess the vehicle. Even in bankruptcy. It might take a little longer in bankruptcy, but if your lender is a lienholder on your vehicle's title, you have to pay the loan to keep the car.

The reaffirmation agreement is designed for the purpose of allowing you to stay liable on the loan so that you can keep your vehicle.

WHY WOULD YOU DO NOT WANT TO STAY LIABLE ON YOUR VEHICLE LOAN IN A BANKRUPTCY CASE?

First, bankruptcy gives you a one-time opportunity to get out of a bad vehicle purchase. It gives you the unique opportunity to undo the deal. Whether because the vehicle has turned out to be a lemon, costs more than you can afford in monthly payments and other costs, or is simply worth way less than you owe on it, you have an opportunity to give it back and discharge whatever remaining debt there would be.

This is an important option because most of the time after surrendering a vehicle in these situations you would still owe thousands of dollars, the so-called deficiency balance. Bankruptcy enables you to give it back without owing a dime.

Second, you would not want to stay liable on your vehicle loan—and therefore would not want to sign a reaffirmation agreement—if you wanted to keep the vehicle BUT were concerned about the risk that you would have to surrender it in the FUTURE, and be then left owing a bunch of money—that deficiency balance mentioned above.

If so, you'd prefer being allowed to keep the vehicle without reaffirming the loan. This is called the "ride-through" option. You'd just keep making your monthly payments on the loan, keep the insurance current, and once you paid off the loan you'd receive free and clear title to the vehicle. But if at any time before that you could not make the payments, or decided the vehicle was no longer worth keeping, you could just surrender it, and would not owe anything. You would owe nothing because the debt on the vehicle loan would have been discharged in the bankruptcy case, since you hadn't signed a reaffirmation agreement excluding that loan from the discharge.

GIVEN THE ADVANTAGES OF NOT SIGNING A REAFFIRMATION AGREEMENT, WHY SIGN ONE?

Simply, you sign a reaffirmation agreement because most vehicle lenders require you to if you want to keep the vehicle.

Why do the lenders require a reaffirmation agreement? They do so because they WANT you the risk of owing a deficiency balance hanging over your head, inducing you to keep making the loan payments through to the end of the contract. They are afraid that the vehicle's value will go down faster than the balance, and don't want to lose money when you surrender at that point and they can't resell the vehicle for anywhere close to the balance.

Reaffirmation agreements apply only to Chapter 7 "straight bankruptcy." Chapter 13 "adjustment of debts" would likely give you more flexibility, sometimes tremendously much more flexibility particularly with vehicle loans. You may even be able to do a "cramdown," reducing your monthly payment and potentially saving you thousands of dollars on the balance. That will be the topic of the next blog post.

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