Should I Reaffirm My Vehicle Loan?

Many people who file for bankruptcy have vehicle loans and are concerned about what will happen with their vehicle.  They often ask, “Can I keep my vehicle?”  The answer in many cases is, “Yes,” provided the equity in the vehicle is covered by the available exemptions.  Beyond the exemption issue, there may also be an issue with the lender requiring a reaffirmation agreement.

A few lenders (e.g., credit unions, Ford Motor Credit) will require that you sign a “Reaffirmation Agreement” in order to keep your vehicle when you file for chapter 7 bankruptcy.  Many lenders, however, do not require that you sign a reaffirmation agreement to keep your vehicle in a chapter 7 bankruptcy.

In a chapter 7 bankruptcy, your personal liability on a vehicle loan will be discharged, unless you sign a reaffirmation agreement.  [Note: A discharge of your personal liability on a vehicle loan DOES NOT mean you can stop making payments on that loan if you intend to keep the vehicle. If you intend to keep the vehicle but stop making payments on the loan the lender will repossess the vehicle, so you’ll have to keep making the payments if you want to keep the vehicle.]

A reaffirmation agreement is basically just a way to pull a debt out of the chapter 7 bankruptcy discharge so your personal liability on the loan will still be intact after the bankruptcy is over.

If you DO sign a reaffirmation agreement:

• If something happens after the bankruptcy whereby you cannot make your vehicle loan payments, then the lender has the right to repossess the vehicle AND can still pursue a deficiency on the loan against you personally (just like it did before you filed for bankruptcy).
• If your vehicle is totaled and the insurance pays out less than what is owed on the loan, then the lender can still pursue a deficiency on the loan against your personally.
• The lender will continue reporting the payment information to the credit bureaus.
• When you pay off the loan the lender will issue a lien release on the title.
• If your loan balance is way more than the value of your vehicle you should seriously consider if reaffirmation is in your best interest.

If you DO NOT sign a reaffirmation agreement:

• If something happens after the bankruptcy whereby you cannot make your vehicle loan payments, then the lender only has the right to repossess the vehicle and CANNOT pursue any deficiency on the loan against you personally.
• If your vehicle is totaled and the insurance pays out less than what is owed on the loan, then the lender CANNOT pursue any deficiency on the loan against you personally.
• The lender has NO obligation to report payment information to the credit bureaus.
• When you pay off the loan the lender will issue a lien release on the title.
• If at any point after the bankruptcy you decide you no longer want the vehicle (e.g., maybe it’s a lemon or you think you can’t afford the payments any longer), then you can give the vehicle back to the lender and will have no liability on the loan.

There are pros and cons to reaffirming a vehicle loan in bankruptcy and you should seek the advice of an experienced bankruptcy attorney to help explain the details.

By Errin Stowell, W M Law Attorney