November 21, 2017

Chapter 7 Bankruptcy & Reaffirmation Agreements for Cars

Yesterday, I wrote an article on redemption of a vehicle through bankruptcy.  Aside from redemption, there are two other main options to consider: surrendering the vehicle through bankruptcy or reaffirming the vehicle through bankruptcy.  This article addresses reaffirmation of a vehicle in the context of a chapter 7 bankruptcy.

Reaffirming a debt through bankruptcy usually takes the form of a secured debt, such as a car.  By entering into a reaffirmation agreement with the lender on your car during the pendency of your bankruptcy, you essentially re-obligate yourself to the loan, but you also get to keep the collateral, or the car.  Vehicle loans have what is known as an ipso facto clause in the fine print, which essentially states that if you file bankruptcy this is a default of the loan.  Since this a default, the lender can then, at its election, repossess the vehicle.  However, if you are current on your car payments, and do not reaffirm a debt, the lender will most likely not repossess the vehicle as the lender continues to make money off the borrower, provided the borrower continues to pay on the vehicle loan.  By not reaffirming the debt, a borrower is no longer personally responsible for the loan; however, the lender’s security interest is still intact in the vehicle – if the borrower stops paying on the vehicle, the lender will be able to repossess the vehicle, but cannot seek a deficiency against the borrower because the vehicle was never reaffirmed through the bankruptcy.  If a debt is not reaffirmed through the bankruptcy (even if the borrower retains the vehicle and continues to pay), the account will appear on the borrower’s credit reports as discharged in bankruptcy.

So, what benefits are there to reaffirming a debt?  In my mind, it benefits the creditor more than the borrower in most instances.  However, if the vehicle loan is reaffirmed, this will help build credit post-bankruptcy for the borrower, as the account will be treated as a normal account, and if payments are timely, this will improve the borrower’s credit score.  However, if the debt is reaffirmed, and then the borrower loses his or her job 6 months after the bankruptcy, for example, the lender can repossess the car, sell if at auction, and seek a deficiency against borrower.  Therefore, if a borrower is current on payments, I discuss with the borrower if it is really necessary to reaffirm a car loan, and the potential risks involved in reaffirming the car loan.

But reaffirmation of a car loan is one option to consider when filing bankruptcy.

If you are interested in finding out more about bankruptcy and how it may affect secured debt, such as a car loan, please contact me to set up a free in-office bankruptcy consultation.

 

Pursuant to 11 U.S. Code § 528: "I am a debt relief agency. I help people file for bankruptcy relief under the Bankruptcy Code."

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