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A Fresh Start on Your Vehicle Loan through Chapter 7 “Reaffirmation”

A reaffirmation agreement makes you still liable on your vehicle loan so you can keep your car or truck after writing off your other debts. 


The Problem

Is it a struggle to make your car or truck payments? Have you been late on the payments and worried about your vehicle getting repossessed? Would it help your peace of mind if you could comfortably make these crucial payments?

A Solution

If you filed a Chapter 7 “straight bankruptcy” case, most or all of your other debts would likely be permanently written off (“discharged”). As a result you could much better afford to make your monthly vehicle payments.

You’d enter into a “reaffirmation agreement” with your vehicle lender, through which you’d agree to exclude its loan from the discharge of your debts so that you would remain liable on it. And you’d agree to make future payments on time. In return your creditor would allow you to keep the vehicle and would report your on-time payments to the credit bureaus so that you could start rebuilding your credit right away.   

You’d have a fresh start on your vehicle loan.

What’s a “Reaffirmation Agreement”?

A reaffirmation agreement on your vehicle loan is a document that legally excludes that loan from the “discharge” (write-off) of all or most of your other debts that you get through your Chapter 7 bankruptcy case. You have a choice about whether to discharge your vehicle loan or not.

If want to keep your vehicle you would almost always need to remain liable on your vehicle loan. And if you want to remain liable (by not discharging that debt), then you would sign a reaffirmation agreement.

Why Remain Liable on Your Vehicle Loan?

If you stop making payments on a vehicle loan the lender will have the right to repossess it. That’s true even in bankruptcy. The lender is a lienholder on your vehicle, and bankruptcy does not change a lienholder’s right to its collateral if you don’t pay the debt.  

But while the lienholder’s right to repossess the vehicle for nonpayment survives bankruptcy, your obligation to pay the vehicle debt can be discharged. In fact that obligation IS discharged unless you sign a reaffirmation agreement excluding it from discharge.

So the reason for a reaffirmation agreement is for you to reassure the lender that you will continue to be liable on the vehicle loan in spite of filing bankruptcy, so that the lender will not repossess your vehicle.

Is There Any Reason Not to Sign a Reaffirmation Agreement?

Two reasons.

First, bankruptcy gives you a one-time opportunity to get out of a bad vehicle purchase, or one that is no longer worthwhile. The vehicle may have turned out to cost too much to maintain or repair, or costs more than you can afford in monthly payments and insurance. Or the car or truck may now simply be worth way less than what you owe on it. So it’s important to understand that filing bankruptcy gives you the opportunity to give back a vehicle and just discharge whatever you owe on it.

Keep in mind that after surrendering a vehicle you would usually still owe on the debt, sometimes thousands of dollars. That’s the so-called deficiency balance: the debt with all the late fees and various costs of repossession and resale, minus the proceeds from the lender’s sale of the vehicle (usually at an auto auction). The deficiency balance owed after surrendering the vehicle is often much more than you’d expect. Bankruptcy gives you the rare opportunity to surrender a vehicle and owe nothing. So even if you think you should keep and pay for your vehicle, stop to think about whether surrendering it (and getting a cheaper vehicle) would be wiser.  

The second reason you might not want to sign a reaffirmation agreement is the risk that you would not be able to keep up the payments in the future. If so your vehicle could be repossessed and you be left owing a lot on the deficiency balance as mentioned above.

If that were to happen you may have wished that you hadn’t signed a reaffirmation agreement. That’s because without that, the lender could not pursue you for a deficiency balance. Without a reaffirmation agreement, the debt on that loan would have been discharged in the Chapter 7 case. You would have been making payment only to keep the creditor happy month to month, and eventually perhaps pay off the lien.

This paying-on-the-lien-without-reaffirming-the-loan is called the “ride-through” option. You’d just keep making your monthly payments on the loan, keep the insurance current, and once you paid off the loan you’d receive free and clear title to the vehicle. But if at any time before that you could not make the payments, or decided the vehicle was no longer worth keeping, you could just surrender it, and would not owe anything.

With the Advantages of the “Ride-Through” Option, Why Sign a Reaffirmation Agreement?

Simply, you take the reaffirmation agreement option because most vehicle lenders make you do so if you want to keep the vehicle.

Why do the lenders require a reaffirmation agreement? Because it’s to their advantage that the risk of owing a deficiency balance is hanging over you. That will give you more incentive to keep making the loan payments through to the end of the contract no matter how your circumstances change.

The lenders also have the law on their side on this issue in much of the country. In most place but not necessarily everywhere, a vehicle lender has the right to repossess a vehicle as soon as the bankruptcy is completed EVEN if the debtor is current on monthly payments and has appropriate insurance in force, IF the debtor did not sign a reaffirmation agreement. So if you want to keep your vehicle and not worry about it being repossessed at any time, you generally have to reaffirm the debt.

But be sure to discuss this thoroughly with your attorney. You may have more leverage to do a “ride-through” in your part of the country. And certain vehicle lenders—more likely local ones—may be more flexible.  You may be able to have your cake and eat it, too: keep your vehicle and keep up the payments, but not enter into a reaffirmation agreement in order to avoid the risk of a future deficiency balance.


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