Can I Reaffirm A Car Loan in Bankruptcy

When an individual files a Chapter 7 bankruptcy the discharge applies to secured debts, however the lender can still enforce the security interest. Thus when someone fails to make car payments after going bankrupt, the lender can repossess the vehicle, but it can not come after the debtor for additional funds, when the price the repossessed vehicle sells for is less than the outstanding loan.

In a Chapter 7 bankruptcy the debtor sometimes wants to enter a reaffirmation agreement on a car loan, which makes the debt fully enforceable, just as if the debtor had never filed the bankruptcy.

There are advantages of signing a reaffirmation agreement. Some car lenders will require the debtor to sign the reaffirmation agreement as a condition of keeping the vehicle, and the law gives them this right. Most secured lenders though seem happy to accept the payments whether or not there is a reaffirmation agreement and in this case the borrower will still own the property once the loan is paid off.

Anther advantage of signing a reaffirmation agreement is that signing the allows the lender to resume sending monthly statements, which helps him keep track of when payments are due. Furthermore, if you pay off a secured debt that has been reaffirmed it will show positively on your credit report.

The big disadvantage of reaffirming a car loan is that, if the debtor fails to keep up the payment the lender can still collect a deficiency after the property is repossessed. For this reason a bankruptcy judge will not approve the reaffirmation agreement, if he does not believes the debtor can keep up the payments. If the schedules on the bankruptcy petition indicate that the debtor cannot afford the loan, the court will presume that signing a reaffirmation agreement creates an unreasonable hardship. The debtor can present fact to the court however, that the court might not have been aware of and ask the judge to reconsider. For example, I once used the fact that a client had quit smoking after filing bankruptcy, which freed up a couple hundred dollars a month in income to make the car payment.