Keep Your Car During Bankruptcy

You can keep your car in bankruptcy.  In chapter 7 you have to do a reaffirmation agreement.  In chapter 13 you have to take care of the car through the plan.

Why Is A Reaffirmation Agreement Required In Chapter 7?

If you do not sign a reaffirmation agreement, the lender can repossess the car, even if you are still making the payments.  This is because because the debt you owe on the car gets discharged in a chapter 7, but the bankruptcy does not discharge the lien.  Since the lien is not discharged, the creditor still has the right of repossession.   This is one of the most complicated concepts in bankruptcy and it involves a long discussion of property rights in the US Constitution.   The bottom line is that you have to sign a reaffirmation agreement to keep your car after a chapter 7.

What Is A Reaffirmation Agreement?

A reaffirmation is an agreement between you and the bank that the bankruptcy had no effect on your car loan.  Basically, you are agreeing to keep things the way they are with the car loan.  There is one big catch, if you stop making payments and the car gets repossessed, you are liable for any deficiency (the debt left over after the car is sold at auction).  If you do not sign a reaffirmation agreement or you surrender the car in bankruptcy, there is no deficiency.

This means that you have to make a careful decision, before you sign a reaffirmation agreement.   If you sign the agreement, you can keep the car but cold be liable for a deficiency.  If you do not sign the agreement, the lender on the car can repossess the car at any time, even if you are still making payments.

Should You Sign A Reaffirmation Agreement

Most of my clients decided to sign reaffirmation agreements.  But you should only sign a reaffirmation agreement if you can stay current on the car payments or only have a short time left on the loan.  You do not want to get stuck with a deficiency debt.  If you don’t want to reaffirm your car or you don’t think that you can keep up with the payments, you have a couple of options.

If you are behind on your car payments or need to reduce your loan payments, you can try a redemption loan.  A redemption loan is done through the bankruptcy and reduces the balance of the loan to the value of the car.   This is particularly helpful if you rolled an old car loan into your current loan.

You can also surrender your current care and get a replacement.  There are many reputable car dealers that sell used cars to people just out of bankruptcy.  If you have a high end car but can no longer afford it due to a change in circumstances, you are better off downgrading to something more affordable.   Additionally, this can help you rebuild your credit.