To keep your car during and after a Chapter 7 bankruptcy, you sometimes need to sign a reaffirmation agreement with the lender and have it approved by the bankruptcy court. This agreement is a contract that confirms you're committed to continue paying your car loan after bankruptcy. It comes with a risk: If you fall behind on your car payments after your bankruptcy, your car may be repossessed and you may be left to pay a deficiency balance.
Written by Attorney Paige Hooper.
Updated May 11, 2022
Filing Chapter 7 bankruptcy can help you deal with overwhelming debt. It can wipe out credit card debts, medical bills, payday loans, and other debts not tied to property. Debt that’s tied to property is treated differently in bankruptcy. In some cases, bankruptcy filers don’t want to get rid of this debt because it means they also have to give up the property. For example, if you have a car that’s financed by an auto loan, you may want to keep it despite filing bankruptcy. This is where reaffirmation agreements come in.
In this article, we’ll cover what reaffirmation agreements are and how they work in Chapter 7 bankruptcy cases.
What Is a Reaffirmation Agreement?
Typically, reaffirmation agreements in Chapter 7 cases are for a car. When you got your original car loan, you entered into a contract with the lender agreeing to make a certain monthly payment and abide by other terms. A reaffirmation agreement is also a contract between you and the lender. It’s a special agreement you can make with your lender during bankruptcy to reaffirm your commitment to the loan. Essentially, you’re agreeing that you’ll remain responsible for the debt and you’ll keep paying on the loan during and after the bankruptcy. In exchange, you get to keep the car.
Some lenders require you to sign a reaffirmation agreement if you want to keep your car after bankruptcy. Other lenders allow you to keep your car as long as you continue to make the payments, even if you don’t sign a reaffirmation agreement.
The lender gets a say in what you do with your car because car loans are secured debts. The car is collateral for the loan, and the car loan gives the lender a security interest in the car. This gives them the legal right to repossess the car if you default on the loan. Whether you sign a reaffirmation agreement or not, you must still pay the debt if you want to keep the collateral.This is true even after filing bankruptcy.
How Do Reaffirmation Agreements Work?
You can only enter into a reaffirmation agreement if you’re current on your car payments and the equity you have in the car is fully protected by exemptions. As a reminder: Equity is the car’s current market value minus what you owe on it and exemptions are laws that allow you to protect up to a certain amount of different kinds of property during your bankruptcy case. Exemption laws vary by state. Also important to keep in mind is that reaffirmation agreements are voluntary. The creditor can’t force you into one.
If you wish to reaffirm a debt, you’ll need to follow a few steps. First, let the court know. You can indicate that you want to reaffirm a debt on your Statement of Intention form. Then you also need to mail a copy of this form to the lender and ask them to draft a reaffirmation agreement and send it to you. You’ll need to read and sign the agreement and fill out any required information to demonstrate you can afford to keep making payments. Finally, send the agreement back to the lender within 45 days of your meeting of creditors.
The lender will then file the agreement with the bankruptcy court. Your agreement has to be approved by the court. The bankruptcy judge may deny the agreement if:
They believe you can’t afford to keep paying the loan,
The debt is significantly more than the current value of the car, or
The interest on the loan is too high.
Filing bankruptcy is a chance to get a fresh start financially. When the judge reviews your case and the reaffirmation agreement, they’ll want to be sure it’s in your best financial interest. They look at your post-bankruptcy budget (which you lay out in Schedules I and J) to make sure you can easily make the loan payments. If not, they may deny the agreement. That doesn’t mean you have to go without a car, though. It may be better for you to surrender the car and purchase another one that fits within your budget.
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What Are the Pros and Cons of Signing a Reaffirmation Agreement?
As with anything in life, signing a reaffirmation agreement has its pros and cons. Let’s take a look at both.
The Pros of a Reaffirmation Agreement
If your lender requires a reaffirmation agreement for you to keep your car, then the biggest benefit of signing a reaffirmation agreement is keeping your car. Most reaffirmation agreements carry the same terms as the original loan, so you’ll want to be sure the current loan terms are affordable. That said, this does give you a chance to try to renegotiate the terms of your loan. You may be able to lower your payment or get a better interest rate.
A reaffirmation agreement also ensures that the debtor is still entitled to all the rights they had under the original loan agreement. This could include things like notice rights, grace periods, and the right of redemption or right to reinstate.
The Cons of a Reaffirmation Agreement
The biggest drawback to signing a reaffirmation agreement is that it guarantees that you can’t walk away from the debt going forward. If you fall behind on your car loan, the lender can repossess your car. If you signed a reaffirmation agreement, you’ll be responsible for paying any deficiency balance. If you don’t pay the balance, the creditor can sue you and get a court order to garnish your wages or bank account.
After a Chapter 7 discharge, you can’t file another Chapter 7 case for eight years. In other words, if you have a deficiency balance, the lender’s collection efforts can last for years. The bottom line is that you should only enter into a reaffirmation agreement if you reasonably believe that you’ll be able to pay off the balance.
Do I Have Any Other Options?
When you sign for an auto loan, you’re making a guarantee in writing that you’ll make the payments or the bank can take your car. So, if you want to file Chapter 7 bankruptcy and keep a car that’s financed, your only option is to pay the car loan. If you’re current on your payments when you file bankruptcy, you can sign a reaffirmation agreement confirming your obligation to pay for the car. Or, if your lender allows it, you can keep making your car payments without signing a reaffirmation agreement.
Another option for keeping your car through bankruptcy is redeeming the car. Redeeming the car means that you buy the car for its current value. Basically, you give the lender a single lump-sum payment that covers the car’s current value. You probably already see the drawback to this — most bankruptcy filers don’t have a lump sum of money to use to redeem their vehicle.
If you would struggle to make the car payment even after a bankruptcy, and if you don’t have a large amount of cash that you could use to buy the car outright, it might be best to consider letting it go. Though you may really want to keep your car, remember that filing bankruptcy opens up an opportunity to get rid of an unaffordable car loan. By surrendering the car, you can free yourself up to purchase a more affordable car that won’t have you struggling to make ends meet.
If you’re current on your car payments and you want to keep your car during and after a Chapter 7 bankruptcy, you may need to sign a reaffirmation agreement with the lender and have it approved by the bankruptcy court. A reaffirmation agreement is a contract that confirms your commitment to continue paying a car loan after bankruptcy. But remember, if you fall behind on your car payments after your bankruptcy, you put yourself at risk of repossession and having to pay a deficiency balance.