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New car loan after bankruptcy?

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Dear Bankruptcy Adviser,
After bankruptcy, what would help me repair my credit quicker — reaffirming with my present car loan, or getting a new car and loan?
— Dennis

Dear Dennis,
I think this is an excellent question, but there are a couple of things to consider before answering your specific question.

What do you owe on your current car? What is the interest rate? How reliable is your current vehicle? Your current car could require a lot of repairs and maintenance, or the balance could be very high. These are important factors to consider prior to reaffirming the loan.

I believe my questions are as important as, or more important than, the question you ask. You have just filed bankruptcy and wiped out your liability for your outstanding debt. Your liability on the car loan was also wiped out, but you might want to keep the vehicle and reaffirm the loan.

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 wipes out your legal liability to pay on the car. When you sign a reaffirmation agreement, you are re-establishing that liability.

After bankruptcy, you will be able to get another car — but most likely not the car of your dreams. You will have to settle for a less flashy, but still reliable vehicle as you begin to prove that you are worthy of credit.

Getting a reliable car with a low monthly payment and low balance is a wise way to start over. After paying this car off, you will have more leverage to get another vehicle, one that you might be more excited about.

You ask which will be better for your credit. I am not an expert on credit scores, so it is difficult to answer this question with any level of conviction, but I do know a few things about credit.

For instance, the length of time that an active, positive credit line appears on your credit is one factor used in calculating your credit score. The length of your credit history makes up 15 percent of your credit score. When you reaffirm a loan through the bankruptcy, you will show the payments made prior to the bankruptcy as well as payments made after the bankruptcy is over.

By contrast, if you get a new car loan after filing bankruptcy, you will have much less credit history for that new loan.

I hope this helps you answer your own question. You will need to decide whether the reaffirmation is worth the risk or whether it is best to start rebuilding credit with a used but reliable car. Either way, as long as you make your payments, your credit will slowly recover.

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