Should I Reaffirm My Vehicle Loan in Bankruptcy?
Surrendering the Car:
It is not uncommon for car owners to be behind on their car payments on the date of the bankruptcy filing. Some clients specifically file a Chapter 13 bankruptcy to give them an opportunity to catch up the delinquent car loan payments and avoid repossession. In Chapter 7, however, if they are unable to afford the car payments moving forward, clients are recommended to surrender the vehicle and discharge the outstanding balance of the loan.
Reaffirming the Car Loan:
After the bankruptcy filing, car lenders typically send reaffirmation agreements to the Chapter 7 debtors. These agreements, if signed, re-obligate the debtor to the car loan post-bankruptcy, thereby precluding the outstanding principal balance from being discharged once the Chapter 7 bankruptcy is concluded. However, staying current on the now reaffirmed car loan payments moving forward prevents the lender from repossessing the vehicle. Typically, reaffirming a car loan is only recommended for those who are current on the loan, can afford the car payment moving forward, and perhaps, have equity in the car (i.e. the value of the car exceeds the outstanding loan balance).
Some individuals simply cannot surrender their vehicle, either because they need it for work and family use or they don’t have access to alternate transportation. Unfortunately, they may also be at financial risk of being unable to maintain the payments moving forward, or they do not have equity in their vehicle worth pursuing. In this situation, the car owners can continue to make the car payments moving forward without reaffirming the loan, but it leaves them at risk of an untimely repossession. Typically, lenders are glad to receive payments, so long as they are made regularly, and allow them to keep the vehicle without the reaffirmation. As an added benefit, the car loan (should the individual later decide to surrender the vehicle or it gets repossessed) is covered by the bankruptcy discharge.
For more info, check out "Your Car in Chapter 7 Bankruptcy" by Stephen Elias at www.nolo.com.