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Reaffirming an auto loan in Chapter 7

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Dear Bankruptcy Adviser,
My wife and I filed for Chapter 13 bankruptcy that was converted to Chapter 7, which was discharged in February 2008. We tried to reaffirm both of our autos, and the bankruptcy judge would not allow it.

We had been continuing to make payments, and my wife’s car is now paid in full. However my auto is not, and I noticed on my credit report the account is listed as closed. I am still making payments on the car and still have possession of the car.

Since I am not getting any credit for making my timely payments, and I have been approved for a new auto loan, what should I do with my current vehicle? What should I do with the old vehicle — turn it back in or try to trade it in when making the new car purchase?


Dear Troy,
Sometimes judges act like a caring parent — deciding what is best for a child and not giving any say in the matter. This can be a wonderful thing because it keeps you from having to make the decision: Should I keep the car or not?

Reaffirmation of a vehicle loan, or any debt for that matter, means that you agree to accept legal responsibility for the remaining loan balance after your bankruptcy case is closed. Most lenders require the agreement in order for you to keep your car. Also, this is usually the only way to receive monthly statements again and to have future payments reported on your credit report. These agreements can help you re-establish credit more quickly with a positive post-bankruptcy payment history.

As of now, the car balance has been eliminated in the bankruptcy. You may be able to continue paying the creditor directly and keep the vehicle. Each lender handles reaffirmations differently. From my experience, most of the major vehicle finance companies believe that after filing bankruptcy you must reaffirm, redeem or surrender your vehicle. These lenders are not allowing borrowers to keep the vehicle and continue making payments.

Since the bankruptcy law change in October 2005, the Japanese and German automakers were more willing to work with people after bankruptcy. The American automakers would repossess the car without having a signed and judicially approved reaffirmation agreement. And the remaining automakers were handling this issue on a case-by-case basis. Now, it appears all lenders require a reaffirmation agreement, judicially approved, for you to keep your vehicle.

Somewhat interestingly (to other attorneys only), attorneys also have different interpretations of the reaffirmation provision in the bankruptcy code. Some believe that when you make an attempt to reaffirm, but the court rejects your motion, then you ought to be able to keep the vehicle and continue making payments. However, while this might be good in theory, the problem is that you will be required to fight with the car lender in court to enforce this interpretation. The result will be more attorney fees and no certainty as to your ability to keep the car.

Most attorneys are telling their clients to surrender the vehicle, thus eliminating the remaining balance along with the other debts. Some tell the client to see whether the lender will work with them. You ought to contact the lender directly, now that the judge has rejected your reaffirmation agreement. You might be able to work out a deal with the lender or you might just have to drive it to the dealer and turn in the keys.

I have yet to have a client tell me that he or she could not obtain another car after filing bankruptcy. It might not be the ideal car, but your priority is to get to work. If your business “requires” that you drive a fancy car to impress clients, you might have a more difficult time finding the right vehicle. However, most people are simply too emotionally attached to a vehicle and believe it is their right to have the car that they desire. This type of thinking generates more clients for bankruptcy attorneys than almost any other consumer behavior.

Regardless, try to proactively deal with the issue rather than waking up one day and having your car be dragged behind a tow truck on the day you have the most important meeting of your career.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the “Ask the Experts” page, and select “bankruptcy” as the topic.