That is one of the most asked questions that folks looking to file a Chapter 7 bankruptcy to obtain immediate and lasting debt relief have. If you've been researching the different types of bankruptcies and how they work, you probably already know that you won't have to give up all of your possessions when filing a Chapter 7 bankruptcy case. Bankruptcy exemptions, whether under the U.S. Bankruptcy Code or pursuant to the law of the state you live in, protect most basic property, including the typical family car.
Your car as an asset
Exemptions only come into play for property (called assets) the filer owns free and clear. If you’re still making payments on your car loan, you should also learn about reaffirmation agreements. This article will discuss what a reaffirmation agreement does and why it matters to you.If you own your car free and clear, things are pretty straight forward. It's an asset and as long as the available exemption covers its full value, you get to keep it even after filing a Chapter 7 bankruptcy. If it's not covered by an exemption, for example, if you own two cars free and clear but can only protect one of them, the bankruptcy trustee will sell it to the highest bidder and use the money to pay your a part of your unsecured debts. Most filers don’t have this issue, as most folks don't have multiple cars, never mind multiple cars that are fully paid off.↑ Back to top
Your car as a liability
If you're still making payments on your car, you own the car and have to list it as an asset. This is true even if you're hopelessly upside down because you owe a lot more on the loan than the car is worth. If you're one of the few whose car is worth more than their loan balance, you have equity. Again, as long as available exemptions cover the full amount of the equity, the trustee can't do anything with the car. But, that's not the end of the story… You still have that car loan, which is a secured debt, to deal with.
The main difference between a secured debt, like a car loan, and an unsecured debt, like a credit card, is that the creditor does not have a security interest in any of your property. In other words, they can't repossess the items you purchased with the credit card (assuming it wasn't a store credit card), even if you stop making payments.First things first. Chapter 7 bankruptcy is not a way to get a free car. So, if you haven't paid for your car yet (because you're still making payments on the loan), then the only way to keep the car is to pay for it. One way to do this is through a redemption, where you pay for the car's current value in a single payment, no matter how much you owe. If that sounds like an option for you, here's where you can learn more about how to redeem your car.If you're like most, you probably don't have access to that kind of money right after your bankruptcy filing, which means you're now wondering how you're supposed to pay for your car so you can keep it. That is where reaffirmation agreements come in.
What is the purpose of a reaffirmation agreement?
A reaffirmation agreement allows a bankruptcy filer to keep their car by removing the reaffirmed debt from the total debt that is being discharged. They exist, in large part, to protect banks and credit unions after a Chapter 7 bankruptcy.↑ Back to top
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How do I get a reaffirmation agreement?
Thankfully, your lender is in charge of preparing most parts of the reaffirmation agreement, which typically looks something like this. They will do so if you let them know that you want to reaffirm the car loan in your Statement of Intentions. As long as the Statement of Intentions is filed at the same time as your bankruptcy petition, they’ll often send it to you (or your bankruptcy attorney) even before the first date set for your meeting of creditors.
What’s in a reaffirmation agreement?
In its most basic terms, the reaffirmation agreement is a restatement of the terms of the loan, that identifies the balance left owing on the loan as of the date the bankruptcy was filed, the interest rate, the monthly payments, and how many payments are left.
You can get a good summary of the terms of the agreement from the cover sheet that has to be completed along with it.
The terms are typically the same as before, unless you're able to negotiate more favorable terms as part of the reaffirmation, like a reduction in the interest rate. Getting such concessions is possible as part of the reaffirmation process, but unfortunately it's not all that common.
What do I have to do with the reaffirmation agreement?
There are a few things you’ll have to fill out once you receive the reaffirmation agreement. As part of the agreement, you have to provide an updated budget showing your current income and expenses. If this information is different from the information you listed in your Schedules I (income) and J (expenses), for example, because you got a raise, or cancelled your cable service, you'll have to explain the change.
What’s a presumption of undue hardship?
If your monthly income is not enough to cover your monthly expenses a so-called presumption of undue hardship arises. In other words, because your expenses exceed your income, it is assumed that making your car payment every month is a hardship for you. In that case you’ll have to provide an explanation about how you will be able to make the car payment even though you're in the red at the end of the month. Surprisingly, this is not uncommon. Most folks simply explain that they tend to prioritize their car payment over other expenses because they recognize the need to make the payment.↑ Back to top
I signed my reaffirmation agreement, now what?
What comes next is a little different than your typical contract, where you sign, they sign, and everything is done. For a reaffirmation agreement to be binding, it has to be either approved by the bankruptcy court, or certified by the debtor’s attorney.If you have a bankruptcy lawyer helping you, they can sign the reaffirmation agreement, thereby essentially certifying that it won't be an undue hardship for you make this payment. Not all attorneys will sign this certification, but that's ok. Talk to your attorney about whether they will sign your reaffirmation agreement and if not, what to expect.
What if I don’t have a bankruptcy lawyer?
If you don’t have bankruptcy lawyer, or they won't certify your reaffirmation agreement, it will be up to the United States bankruptcy court to decide whether it's in your best interest to approve the agreement. Remember, the purpose of your Chapter 7 bankruptcy is to give you a fresh start, and the court doesn't want you to jeopardize your fresh start by agreeing to a payment you can't afford. Also, even if the payment is not that much of a problem, if your car is worth significantly less than you owe on it, reaffirmation is a risk no matter what.
Reaffirming a debt secured by personal property like a car is a risk, no matter what
Whether the car is repossessed because you were unable to keep up your payments, or the car is totaled after an accident, once the reaffirmation agreement is approved by the bankruptcy judge, the reaffirmed debt is excluded from your discharge and you have to pay it off no matter what. This is especially risky because you can only file Chapter 7 bankruptcy every 8 years, so there is no easy relief available if anything goes wrong.↑ Back to top
What happens at a reaffirmation hearing?
If court approval is required, the judge will typically set a reaffirmation hearing as part of your bankruptcy proceeding. The purpose of the hearing is to discuss it and how it impacts your personal liability on the reaffirmed debt with you. The hearing can be stressful and scary - you're going to be talking to a federal bankruptcy judge, after all - but it's nothing to be nervous about! For the most part, the bankruptcy judge just wants to make sure that you know what you're agreeing to and understand the risks involved. Many bankruptcy courts across the country have district specific information on their website about how reaffirmation agreements, and the hearings, are handled, so make sure to check your court’s website to find out the important details and what resources are available.↑ Back to top
If you owe money on your car and plan on keeping the car and reaffirming your obligation to pay the loan, make sure you let the court and your creditor know that on your Statement of Intentions. Then, typically, all you have to do is to stay current with payments, keep your car insured, and wait to receive the reaffirmation agreement from the lender.↑ Back to top