In a Chapter 7 case you “reaffirm” your vehicle loan if you want to keep your vehicle. This means you keep paying it.
Most debts that you owe are discharged in a Chapter 7 “straight bankruptcy.” That means that they are legally, permanently written off.
That includes your vehicle loan. But with a vehicle loan the lender has a lien on your vehicle. So if you don’t pay on it the lender has a right to take your vehicle. A Chapter 7 filing would usually just delay that by a few weeks.
So if you want to keep your vehicle, you have to voluntarily exclude the vehicle loan from the discharge of debts. You have to agree to reaffirm the debt.
The term makes sense. You originally agreed to pay the vehicle loan when you bought the vehicle. Then you file the bankruptcy case in which that loan would be discharged. But instead you reaffirm the loan obligation, saying you want to owe it after all, by excluding it from the discharge.
The Reaffirmation Agreement
A reaffirmation agreement is the document through which you exclude your vehicle loan from the debt discharge. It’s generally prepared by your vehicle lender and sent to your bankruptcy lawyer. You review it with him or her, if you agree you sign it, and then it’s filed at the bankruptcy court. The reaffirmation agreement must be filed at court before the court grants the discharge of debts, and it must meet some other conditions. See Section 524(c) of the U.S. Bankruptcy Code.
You Are Not Required to Reaffirm the Vehicle Loan
It’s crucial to understand that you do not have to reaffirm the debt. Bankruptcy gives you a one-time opportunity to get out of a bad vehicle purchase. It gives you the opportunity to owe nothing on the contract, if you so choose, for whatever reason. The vehicle may have turned out not be reliable. You may not be able to afford its monthly payments and other costs. You may owe more than the vehicle is worth.
So instead of reaffirming the vehicle loan, you have the unique opportunity to surrender the vehicle and discharge whatever remaining debt there would be.
Most of the time when you surrendered a vehicle you would still owe the creditor thousands of dollars. This is called the deficiency balance—the amount of debt you owe, plus usually substantial fees, minus a credit for the proceeds of the sale of your sold vehicle. Think seriously about taking advantage of the option of surrendering your vehicle and then owing nothing.
The Risk of Repossession if You Reaffirm
If you reaffirm a vehicle loan and then later can’t make the payments, your vehicle will get repossessed. And then you’ll likely owe a deficiency balance. That’s because the reaffirmation agreement reinstates all of the lender’s rights. That’s another reason to consider very seriously, and discuss with your lawyer, about whether it’s truly wise to keep the vehicle and reaffirm the loan.