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 1 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?
Your attorney gives good 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 cancels 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% -- 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 vehicle after your bankruptcy is completed. 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: