Reaffirm car loan after bankruptcy?

From the Boston Globe

By Justin Harelik•

Dear Bankruptcy Adviser,
I am filing Chapter 7. I have a car loan for a vehicle that is worth less than $15,000, and I have one year remaining with a balance of less than $5,000. My attorney recommends I not reaffirm. Do you agree, or is it better for me to reaffirm this debt?
— Stitch

Dear Stitch,
Your attorney gives sound advice. I am not a fan of reaffirming a car loan after you file bankruptcy. If you are able to continue making payments on the vehicle without a reaffirmation agreement, you will eventually get the title to the car in about a year.

A reaffirmation agreement is a legal, enforceable contract, filed with the bankruptcy court, which states your promise to repay all or a portion of a debt that may otherwise have been subject to discharge in your bankruptcy case. The bankruptcy wipes out your legal liability to pay on the car. When you sign a reaffirmation agreement, you are re-establishing that liability.

This does not mean that you can keep the car, not make payments and receive the car title. That would be too easy. The reaffirmation agreement re-establishes liability otherwise eliminated in the bankruptcy. And failing to make payments means the car will be repossessed, sold and you will be liable for any remaining balance. This is exactly what happens when you don’t file bankruptcy, have a car repossessed, get sued and must pay the remaining balance.

Unfortunately, the majority — about 65 percent — of car lenders make a reaffirmation agreement mandatory as a condition of keeping the car. This means that you will not be able to choose whether you want to sign the reaffirmation agreement. Failing to complete the reaffirmation will allow the lender to repossess the car after your bankruptcy is over. If that does happen, you will not be liable for the remaining balance because you did not reaffirm the loan.

Benefits of the reaffirmation: I don’t think there are many benefits to signing a reaffirmation. However, there are a few.

  • The future payments will be reported on your credit reports. After the bankruptcy, you will show current monthly payments on the car and this will help to re-establish good credit post-bankruptcy discharge.
  • The lender will send you a monthly billing statement or payment coupons. Many lenders will not do this unless you reaffirm the loan.
  • You will get some warnings from the lender when you fall behind on payments. Some lenders are very aggressive. If you fail to sign a reaffirmation agreement and fall behind on the payments after your case is over, the lender will repossess the car quickly. You would not be liable for the difference owed after the car is sold.

When does a reaffirmation on a car loan make sense?

  • Low balance. You probably would be safe enough to file the reaffirmation because you only have approximately 12 payments left. It is more likely than not that you will be able to complete the payments and receive the car title.
  • Low payment. A low monthly payment usually means you will be able to afford making the payment after signing the reaffirmation. There still is a risk, especially if you were to lose your job. But even with unemployment, you might be able to afford a payment that is less than $200 per month.
  • No other car available. That means you cannot come up with $2,000 to buy a reliable used car. I would still only recommend reaffirming the loan when the car has a low payment and low balance.
  • Co-signer exposure. Someone used his or her credit to help you get a car loan. You don’t want to hurt the co-signer’s credit. Even if the payment is difficult, most people don’t want the lender suing a person who was willing to help you get the car — especially when that person is a mom, dad, sister or brother.

When does a reaffirmation not make sense?

  • High balance and high interest rate. You can and will be able to find another car after bankruptcy. Car lenders are desperate and car loans are available for people who have recently filed bankruptcy. Don’t become too emotionally attached to your car such that you cannot see when it is best to surrender the car and find something new.
  • You are unemployed. Unless the payment is very low, you just don’t want to take any liability after your bankruptcy is over. Yes, I know you will need a car to find a job and go on interviews, but that process could take a while and you could end up with a post-bankruptcy filing, post-reaffirmation repossession. That would compound a difficult situation.
  • The value of the car is much less than what you owe. While most people owe more on their car than it is worth, you ought to see how far upside down you actually are. If the value of the car is less than 50 percent of what you owe, a reaffirmation might not make sense.

I hope you can avoid the risk of reaffirming the car and simply continue to make payments. While your credit score may not see the benefit of the future payments, you will avoid additional risks such as repossession and a lawsuit after your bankruptcy case is closed.

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