If you want to keep your vehicle and still pay on its loan, file a Chapter 7 case to write off other debts and reaffirm the vehicle loan.
A Vehicle Loan is a Secured Debts
We started this series of blog posts on debts by introducing secured debts as follows:
Each of your debts is either secured by something you own or it is not. A secured debt is backed up by a lien, a legal interest of the creditor in some kind of property of yours. See Section 101(37) of the U.S. Bankruptcy Code.
Usually, you know whether a debt is secured. For example, in the case of a vehicle loan the vehicle’s title states that your lender is the lienholder. That lien on the title makes the loan secured by the vehicle. That, together with the security agreement you signed, gives the lender certain rights over your vehicle.
Let’s assume that you have a vehicle that you are paying for through a vehicle loan. If you look at your vehicle’s title, your lender is listed as the lienholder on your vehicle. The loan documents include a security agreement that gives the lender the right to repossess the vehicle if you don’t make the loan payments.
Also, let’s assume that you really want to keep your vehicle. One of the main reasons you are considering filing bankruptcy is to write off all or most of your other debts so you can afford to pay your vehicle loan.
Reaffirming the Vehicle Loan
Filing a Chapter 7 “straight bankruptcy” case could well accomplish this. It could permanently forgive (“discharge”) all or most of your other debts. That could free up enough of your monthly cash flow so you’d have money to pay your vehicle loan payments.
Talk with a bankruptcy lawyer to find out which of your own debts would be discharged. Bankruptcy discharges most debts, but there are quite a few exceptions. (See our last 10 blog posts about those exceptions.) Your attorney will help you put together your after–bankruptcy budget. From that, you’ll see whether you’d be able to pay on your vehicle loan after discharging your other debts.
If so, filing a Chapter 7 case and signing a vehicle loan reaffirmation agreement may be your best option.
Reaffirmation Is a Voluntary Discharge Exception
A reaffirmation agreement excludes the vehicle loan from the discharge of debts Chapter 7 bankruptcy otherwise entitles you to. You enter into it voluntarily in return for getting to keep your vehicle.
It’s voluntary because you recognize that your lender has the right to take your vehicle if don’t make your payments. That doesn’t change when you file bankruptcy. The point of the reaffirmation agreement is to allow you to keep your vehicle.
Voluntarily Deciding Not to Reaffirm
You can file a bankruptcy case and choose NOT to reaffirm your vehicle loan. In a Chapter 7 case that would generally mean that you’d surrender the vehicle to your lender. The bankruptcy discharge would then virtually always write off any remaining debt you’d owe on the vehicle loan.
Think very seriously and open-mindedly about this option before you reaffirm the loan. Bankruptcy gives you a one-time opportunity to get out of the vehicle loan. Consider whether you would definitely be able to afford its monthly payments, insurance, maintenance, and other costs. Find out what the vehicle is now worth compared to what you owe. Think creatively about other transportation options. Don’t just reaffirm the loan because you figure you have no other choice. Make it an informed choice, whichever way you choose.
The Risks of Reaffirming
A reaffirmation agreement excludes the vehicle loan from the bankruptcy discharge. So it returns to the lender all of the rights it had over you that it had before your bankruptcy.
That, of course, includes the right to repossess your vehicle if you don’t make payments on time. But likely also included is the right to repossess if you let the insurance lapse. Or the lender may impose its own insurance and charge you an exorbitant amount for it. The lender may even be quicker about force-placing insurance or repossessing after bankruptcy than before.
So do not enter into a reaffirmation agreement lightly. It would certainly be unfortunate for somebody to go through the efforts of a Chapter 7 case, get a fresh financial start, only to have a vehicle repossession and its resulting debt a year or two later.
Are there any other options if you couldn’t afford the vehicle payments even after discharging your other debts?
Also, would you be able to keep your vehicle in a Chapter 7 case if you DIDN’T sign a reaffirmation agreement but just kept current on your payments and insurance?
We’ll cover these practical questions in the next blog post or two.
In the meantime, reaffirmation agreements are covered by the Bankruptcy Code in Section 524(c).