debt

Should you reaffirm car loan in bankruptcy?

Justin HarelikQuestionDear Bankruptcy Adviser,
We recently went through a Chapter 7 Bankruptcy. We lost everything and decided to try to keep one of our vehicles. Our attorney was not on board with us keeping the vehicle, and he refused to sign a reaffirmation agreement. We decided to keep it and continued to make payments. But when we recently checked our credit report, it showed the lender is reporting that the loan was included in our bankruptcy, even though we have been paying great on the loan for the past two years.

My question is: If I decide to give this vehicle up, how is that going to affect us? Yes, it was included in our Chapter 7, but we are trying to rebuild our credit. Why keep paying on something that's not helping us at all?
-- Angie

AnswerDear Angie,
I agree with your attorney. Although you can still file the reaffirmation agreement on your own, I never want my clients to sign reaffirmation agreements. A reaffirmation agreement is a legal enforceable contract filed with the bankruptcy court stating your promise to repay all or a portion of a debt that may otherwise have been subject to discharge in your bankruptcy case.

Some lenders have a mandatory reaffirmation or repossession policy. That means you must sign the agreement to keep your car post-bankruptcy filing. But when the agreement is not mandatory, I always tell the client the risks outweigh the benefits.

From my experience, about 50 percent of lenders have a mandatory reaffirmation agreement policy. These lenders will repossess the car once the bankruptcy case ends -- in some cases even while the case is still open.

When the lender has a "reaffirm or repo" policy, the loan balance, car mileage, make and model become the decision-making factors. A good, reliable car with low mileage is a good car to reaffirm. A car with high mileage, negative repair history and high balance is not.

I understand you want your post-filing payments to appear on your credit report. And it is true that those payments will help improve your post-bankruptcy payment history and credit score. And even though the lender will not report post-filing payments to the credit bureaus without a fully executed reaffirmation agreement, there are other reasons to keep a vehicle.

Once the balance is paid, you will eliminate one more monthly expense while being able to keep a reliable car. These are two great reasons to keep the vehicle.

This is where reaffirming your car loan can be tricky. If you have a high balance owed on an unreliable car, if the car breaks down in six months or so, you must pay for the repairs and continue making the monthly car payment. By not reaffirming the loan, if the car should break, you can just surrender the car to the lender.

Know that surrendering the vehicle even had you not reaffirmed the car loan will have negative consequences. The lender will report the surrender as a "repossession" on your credit report. The upside is that the lender could not sue you for a deficiency balance.

You should avoid any unnecessary post-bankruptcy risks since you are unlikely to file bankruptcy more than once. Reaffirming the debt on an unreliable car is an unnecessary risk.

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