When to Reaffirm Your Car Loan Debt in Bankruptcy

When filing for bankruptcy, you can choose to reaffirm your car loan debt. Reaffirming the debt means agreeing to new loan terms and accepting full responsibility for the debt. The decision to reaffirm is affected by your financial circumstances and the need for transportation; however there are some facts to take into consideration before agreeing to the new loan.

Keeping Your Auto

The bankruptcy court will usually allow a filer to keep their car, even if it is not paid for, if it is clear the person can afford to make payments. The most compelling reason for keeping the car loan is that the car is needed for transportation to and from work.

There are two primary ways to deal with the car loan. You can continue making loan payments after the bankruptcy if the financer agrees to accept them. In that case, if you fail to make loan payments the car can be repossessed, but you are not held responsible for the loan balance since it was included in the bankruptcy.

The second scenario involves a loan reaffirmation which is a new loan agreement between the person filing the bankruptcy and the loan financer. You become personally liable for the car loan even though you have a discharged bankruptcy, and you make a new promise to pay. The contract states the terms of the loan and repayment schedule.  If you fall behind in your loan payments, the financer can repossess the auto and sue for payment.

The reaffirmation loan contract is filed with the bankruptcy court. It must be approved by the judge. If the judge refuses to approve the reaffirmation it is usually because it appears you cannot afford to make the payments.  If you know you plan on reaffirming your car loan, continue making timely loan payments during the bankruptcy process.

Beware of Agreeing to Loan Payments

An attorney will advise bankruptcy filers to consider the condition of their finances after bankruptcy before agreeing to a loan reaffirmation.  You need to be able to afford the loan payments or you will be setting yourself up for financial problems soon after the bankruptcy.  This can undermine you ability to start fresh financially.

Consult an Attorney

It’s important to consult an attorney before deciding whether you should let the bankruptcy discharge your auto loan debt or sign an auto loan affirmation agreement.