My Lender Wants Me to Reaffirm My Car Loan–What Should I Do?

by Dana Wilkinson, Attorney at Law

June 2, 2011

So, you’re in a Chapter 7 bankruptcy and you want to know whether you should reaffirm your car loan.  A reaffirmation agreement basically takes a secured loan, like a car loan, outside the effect of your bankruptcy discharge.  As to that one debt, it’s like you never filed bankruptcy.  You filed Chapter 7 bankruptcy in order to eliminate all the phone calls and threats and creditor harassment, and make a fresh start.  Then you have to decide whether to sign a reaffirmation agreement, which puts you right back on the hook for that debt.  Should you, or shouldn’t you?

Almost everyone wants to keep their car.  In South Carolina, where public transportation is virtually non-existent, it is an unfortunate reality that most people need a car to get or keep a job.  Currently, in order to be absolutely sure of keeping your car after a Chapter 7 bankruptcy, you have to do three things:  make the payments, keep it insured, and sign a reaffirmation agreement. But that should not end the inquiry.  You (and your attorney) should both be looking at whether signing a reaffirmation agreement is in your best interests.  We know you want to keep your car.  But a reaffirmation agreement can have serious consequences, and can seriously interfere with the fresh start that you filed bankruptcy to obtain. So, here are some key factors you should consider.

1.  First, look at the value of your car and how much you owe on it.  If you owe more than the car is worth, reaffirming is a risk.  My clients always tell me that they can and will make the payments.  Maybe so, but what if the car is in an accident and is a total loss?  What if the insurance pays off on the value of the car, leaving you owing the difference?  Then you may have to make payments on a different car, but be stuck owing thousands of dollars on the wrecked car.  You are right back in financial trouble, and you take another hit to your credit rating.  You can check to see of you can buy GAP insurance to cover that difference.  If so, you eliminate some of the risk.  If you can’t buy the insurance, that may be a pretty good indication that you are taking too much risk.

2.  The current state of the law gives the lender the option of repossessing your car if you don’t reaffirm, even if you are making payments.  But they don’t have to repossess.  Many lenders will let you keep the car as long as you continue to make payments on time, and keep the car insured.  In many cases, they are better off doing that, and they recognize that fact.  There are some who will stand on their rights, and who may decide to take the car even if your payments are current. Your attorney can help you evaluate the risk, depending on your lender.  Your attorney can also advise you concerning other issues that may make repossession unlikely.  For example, in some states, if you have a co-borrower who has not filed bankruptcy, there may be no default as to that person, and so no right to repossess.

3.  You should also carefully evaluate your budget, and the available funds to pay the car payments.  In a nutshell, if your budget is tight, you probably shouldn’t reaffirm.  The tighter your budget, the more likely that you will be forced to miss a payment at some point, and that you will lose some of the benefit of going through bankruptcy if you default on a debt that has been reaffirmed.  Consider the overall picture here, too.  How long are you going to be making the car payments?  Are you going to have the car paid off soon, or are you going to have to pay for another four or five years?  Is there some other change in your budget that will make it more difficult (or easier) to make the car payments?  If you have already filed bankruptcy, and you are still struggling to make ends meet, you may want to take that as a sign.

4.  Can you negotiate a better deal from your lender?  Some lenders are willing to listen to a proposal that makes a reaffirmation more favorable to you, either by reducing principal, reducing the interest rate, or capitalizing arrears.   If your concern is that you owe more than the car is worth, ask the lender to reduce principal.  If you are concerned that the payments are too high, ask for a lower interest rate.  Not all lenders will meet you in the middle like this, but there is no harm in asking, and you might get a deal that will make you (and your attorney) a whole lot more comfortable.

5.  Consider your lender, and your relationship with them.  One of the big differences in dealing with reaffirmation agreements depends on whether your lender is a credit union or not.  If the lender is a credit union, you get less protection from the court (and your attorney) and should therefore be more cautious about signing a reaffirmation agreement.  If your account was sold to a new lender after bankruptcy, you may also want to factor that unknown into your thinking.

6.  While you are considering a request to reaffirm a car loan, be brutally practical and honest with yourself.  As noted above, most people who live outside major metropolitan areas in this country need “a” car.  That doesn’t necessarily mean you need the particular car you are driving.  Do you have a friend or family member who would let you borrow (or buy) a car that is underused?  Do you have a source of cash (a tax refund, or a retirement account) that could be used to buy basic transportation for cash?  Remember, practicality and honesty are key here.  I have heard all kinds of explanations over the years for keeping cars (and trucks and motorcycles and motor homes) that basically boil down to “I don’t want to give it up.”  I know you don’t want to–I want you to consider whether you need to.  I recently had a client explain to me that he had to keep a new truck because he had to have a reliable vehicle to get to work.  Okay, I get that.  But then it turned out that his wife, who doesn’t work, also had a new car.  And his teenage son also had a vehicle.  It seemed to me that alternative transportation was available, and that he was confused between “want” and “need.”  Given the serious consequences that go along with reaffirming on a car, I think it’s important to eliminate that confusion.

Other considerations may also impact your decision, including whether your attorney is willing to sign off on your reaffirmation agreement, and whether you will have to attend a hearing and justify your decision to the judge, and whether the judge will approve your reaffirmation agreement or not (which may not be a bad thing).  Stay tuned to Bankruptcy Law Network for more on those issues coming soon.

Image credit:  Paphia/iStock

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Däna (pronounced "Donna") Wilkinson, has been a bankruptcy lawyer in South Carolina for 20 years. She is certified as a bankruptcy specialist by the South Carolina Supreme Court.

Last modified: October 22, 2012