Reaffirm debt to keep car through bankruptcy

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Dear Bankruptcy Adviser,
I’m a college student and my mother recently purchased a car for me, and she is making the monthly car payments. I am listed as the primary; she had to co-sign for me since I’m a student and unemployed. At the time (about 2 months ago), my credit rating was excellent whereas hers was not. Now she’s decided to file for bankruptcy. I am wondering how this will affect my car loan, if the car can be repossessed, and whether my credit report will be affected. Thank you.

— Stella

Dear Stella,
In a nutshell, your credit won’t change as a result of your mother’s bankruptcy. And, as long as the car payments keep getting made, you’ll keep and eventually own the car with no problem.

But first, Stella, let’s examine whether your mother included the car as an asset when she filed. If she did not — in other words, if she committed fraud by hiding an asset from the trustee — the likelihood is you’ll eventually lose the car. If this is the case, she needs to contact the trustee immediately and disclose everything. Or else, you will be on the hook for the balance owed on the car (after the dealer resells it) even though you no longer drive it.

If your mother did include the car as an asset when she filed, under the new bankruptcy laws, she would have reaffirmed the car loan. This means that instead of giving up the car (and the car payment), your mother signed an additional document that basically says, “No matter what happens during or after my bankruptcy, I promise to continue making my payments and keep the car.”

Under the new law, your mother would have prepared and filed a statement of income and expenses with her reaffirmation application. If the statement indicated insufficient income to continue making the car payment there would be a presumption that the reaffirmation was too burdensome, financially. In such an event, unless you can show the court in writing that you are making the payment and you are able to comfortably pay on the debt, the court may disapprove her reaffirmation agreement.

Stella, you’ll notice that even though you wrote in, I keep referring to your mother. The reason is because, from the perspective of the bankruptcy trustee, it doesn’t matter that the car is “your” car. It doesn’t matter that you are the primary signatory. All that matters is that your mother is filing bankruptcy and the car is an asset. Therefore — and this is very important — you must WORK TOGETHER with your mother in order to do the following:

1. Get a copy of the reaffirmation agreement. You want proof that you officially notified the car dealer that you intend to keep the vehicle. This protects you in the event of an “accidental” repossession.

2. After your mother receives her discharge notification (meaning her bankruptcy has been granted), you need to check your credit report every six months. Make sure you get your report from all three credit bureaus. The reason is that sometimes the nonfiling co-debtor (that’s you, Stella) on a vehicle that was included in a bankruptcy petition will get a negative mark on his or her credit report, something like, “Credit line included in bankruptcy.”

3. If you see such a mark, fight it immediately. Follow the process established by each credit bureau to fight inaccurate marks.

Finally, Stella, it’s important to remember that as co-signors, you are co-debtors — in other words, you and your mother are both responsible for this car loan. Once you reaffirm the debt you will have to make every payment until the car is paid in full. Even if she eliminated the debt in her bankruptcy, you would still be obligated to pay the remaining car balance. Anything you can do to help her get through bankruptcy will also be helping yourself.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the ”
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