Car Loan Reaffirmation Pros/Cons
SHOULD A CHAPTER 7 DEBTOR REAFFIRM A CAR LOAN?
A reaffirmation agreement is a contract that a debtor in a Chapter 7 bankruptcy can enter into with one of his or her creditors. The most common type of reaffirmation agreement involves car loans. It is strictly voluntary on the part of the debtor if he wishes to enter into a reaffirmation agreement or not. So the question then becomes - should a Chapter 7 debtor agree to enter into an automobile reaffirmation agreement? The car lenders themselves always want the Chapter 7 debtor to sign a reaffirmation agreement. But is it in the best interests of the Chapter 7 debtor to do so?
What is a Reaffirmation Agreement?
A reaffirmation agreement, as mentioned above, is simply an agreement, or contract, between the Chapter 7 debtor and one of his creditors. The debtor, by signing a reaffirmation agreement, agrees to continue to be personally liable for that debt. If the debtor had not filed for bankruptcy, the debtor is personally liable for that debt, meaning that the creditor could start a lawsuit against the debtor, if the debtor does not pay on that debt.
By virtue of the bankruptcy filing, the debtor will no longer be personally liable, or responsible, for that debt, presuming that debt is discharged in the bankruptcy. Therefore, the creditor cannot legally start a lawsuit against the debtor to collect on debts that have been discharged, or eliminated, through the Chapter 7 bankruptcy. But by signing the reaffirmation agreement, the debtor will once again be personally responsible for that debt. So why sign one?
Advantages of Signing a Car Reaffirmation Agreement
One advantage would be that you get to keep the car you currently have. If you like the car, or if your car is worth more than you owe on the car loan, this is an advantage. Another advantage is that you keep your current car lender. Depending on your point of view, familiarity may be a good thing. Also, the interest rate and other terms on your reaffirmed car loan may be better then what you could get on a new car loan coming out of a bankruptcy. Also, you already are a certain number of months into your current car loan, so you are already that much closer to paying off the car loan in full. If you obtain a new car loan after your bankruptcy is completed, you are starting anew towards paying off that new loan.
Additionally, if you reaffirm your current car loan, the car lender will continue to report that you are making your car loan payments to the credit reporting bureaus. This will help you rebuild your credit. If you do not reaffirm the car loan, the car lender will not report to the credit reporting bureaus that you are making your car payments, even if you are, which will harm you in rebuilding your credit.
However, you are allowed to request from your car lender a statement indicating your payment history, which they will give you on their letterhead. If you do not reaffirm the car loan, but are still making your car payments, you can always obtain that payment history from your car lender, and then submit copies of it to the credit reporting bureaus, and request that they then update their reports. This should resolve this problem, if you do not reaffirm the loan.
Probably the biggest advantage in reaffirming a car loan is that you are eliminating any possibility that the car lender could repossess your car, due to your failure to sign the reaffirmation agreement. The car lenders have the right to repossess your car, at the conclusion of your bankruptcy, if you do not sign the reaffirmation agreement, even if you are continuing to make the car payments. The theory behind this is that you are driving around in their collateral, for which the car lender is not adequately protected, since you are not personally liable for the car loan, if you do not sign the reaffirmation agreement.
By signing the reaffirmation agreement, you are avoiding any possibility of the car lender repossessing your car, due to your failure to sign the reaffirmation agreement. Although the car lender does have the right to repossess the car if you do not sign the reaffirmation agreement, what are the chances that the car lender would actually do so? The answer is slim and none. The reason for that is because there is a profit margin built into the car loan for the car lender in the first place, and car lenders are hesitant to give this up by repossessing a car for which the borrower is continuing to make payments. If there was no profit margin, they would not have made the car loan to begin with. Although the car lender may threaten to repossess if the reaffirmation agreement is not signed, the reality is that they rarely do so. Though it does happen on occasion.
Disadvantages of Signing a Car Reaffirmation Agreement
There is one screaming reason why a debtor in a Chapter 7 bankruptcy may not want to sign a car reaffirmation agreement - by signing the reaffirmation agreement, the debtor is now once again personally liable for this debt.
If the debtor does not make the car payments after the bankruptcy is completed, the car lender will repossess the car, regardless of whether the reaffirmation agreement was signed or not. If the debtor did sign the reaffirmation agreement, and later on stops making the car payments, the debtor will then be personally responsible for any deficiency which exists between what the car lender sells the car for, after repossession, and the remaining balance on the car loan.
For example, assume a car loan balance of $10,000, and that the car is worth $6,000 at the time the car is repossessed for failure to make the car payments. If this debtor had signed the reaffirmation agreement, this debtor would then be legally responsible for the deficiency, in this example, $4,000 (plus the lender's cost of repossession, and other fees that they will tack on), and the car lender would then likely sue the debtor for this deficiency. If this debtor had not signed the reaffirmation agreement, the car lender would not legally be allowed to attempt to collect this deficiency from the debtor. That is a huge reason not to sign a car reaffirmation agreement.
What to do?
That decision is up to the person filing for bankruptcy. Generally speaking, it is our opinion that in most cases the disadvantages outweigh the advantages, and that it usually is in the best interests of the person filing for bankruptcy to not sign a car reaffirmation agreement.