Bankruptcy Attorney Sacramento serving Rosemont discusses five points to consider when deciding whether to reaffirm your car loan as part of completing a Chapter 7 bankruptcy

Debts pile up, you’re laid off, and filing a Chapter 7 bankruptcy seems inevitable. You want to keep your car, but have a car loan with small monthly payments.  Your bankruptcy is going to wipe out the balance due, but you’re going to have to return the car.  There’s a way to keep that car called a reaffirmation agreement.

Here’s five points to consider:

1) Before or outside of bankruptcy: what happens if you stop making your car payments?

Failure to make payments means the car will be repossessed, sold, and you will be liable for any remaining balance.  This is what happens when you don’t file bankruptcy and have a car repossessed – you can be sued and a court order (judgment) says you have to pay the remaining balance.

2) What changes with your car loan situation when you file bankruptcy?

Declaring bankruptcy does not mean that you’ll be able to stop making payments and still keep the car.  No, you get to keep the car only after paying off the car loan.  But you could sign a “reaffirmation agreement” and re-establish your obligation to pay that car loan debt which would have been eliminated in your bankruptcy.

3) What’s a reaffirmation agreement?

A reaffirmation agreement is a legal, enforceable contract, filed with the bankruptcy court, which states your promise to repay all or a portion of debt that could have been subject to discharge in your bankruptcy case.  Your Chapter 7 bankruptcy wipes out your legal liability to pay on the car.  When you sign a reaffirmation agreement, you are re-establishing that liability.

4) Can’t I file and just keep up the payments without “reaffirming” the car loan?

If the car lender makes a reaffirmation agreement mandatory as a condition of keeping the car, you must file a reaffirmation agreement. 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. However, if that does happen, you will not be liable for the remaining balance because you did not reaffirm the loan.

5) Any other benefits of signing up to reaffirm car loan? Yes, but do notice the possibilities of negative consequences too.

• Plus+ point: Your credit report will show current loan payments.  After your bankruptcy, your credit report will show current monthly payments on the car and this will help to re-establish good credit post-bankruptcy discharge.
• Plus+ point: The lender will send you a monthly billing statement or payment coupons. Many lenders will not do this unless you reaffirm the loan.
• Plus+ point: You will get some warnings from the lender when you fall behind on payments.  The lender wants to get paid –repossessing your used car is not its first choice – money is.

With no signed reaffirmation agreement:

• Minus:( point:  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.
• Consolation point? If you car is repossessed after bankruptcy and there’s no reaffirmation agreement involved (no legal contract), you would not be liable for the difference owed after the car is sold.

The advice of an experienced bankruptcy attorney can help you determine your options and action plans in light of your income, assets, and the nature of your debts.  This analysis will enable you to best use the provisions under a Chapter 7 or Chapter 13 bankruptcy to achieve your financial goals.  Please contact our Sacramento office at 916-313-9069 or via email at info@california-bankruptcyattorney.com