Reaffirming Your Car Loan in Chapter 7
Car loans are the most common type of reaffirmation agreement in Chapter 7 bankruptcy. If you are financing a vehicle and want to keep it, your lender will almost certainly send you a reaffirmation agreement to sign. Before you do, understand what you are agreeing to and what alternatives you have.
How Car Loan Reaffirmation Works
When you file Chapter 7, you must indicate on your Statement of Intention (Official Form 108) what you plan to do with each secured debt. For a vehicle, your options typically are: reaffirm, redeem, or surrender.
If you choose to reaffirm, the process works like this:
- The lender sends you a reaffirmation agreement -- typically through your bankruptcy attorney.
- The agreement restates the original loan terms: the balance owed, the interest rate, the monthly payment, and the remaining term.
- You (and your attorney, if represented) sign the agreement.
- The agreement is filed with the bankruptcy court before your discharge.
- If the court approves it (or if your attorney certifies it does not impose undue hardship), the agreement becomes binding.
- You continue making payments. The debt survives your discharge as if bankruptcy never happened.
Why Lenders Push for Reaffirmation
From the lender's perspective, reaffirmation is extremely valuable. Without it, they hold a lien on a depreciating asset (your car) and have no personal recourse against you. If you stop paying in two years, they can repossess the car, but they cannot pursue you for the deficiency -- the difference between what you owe and what the car sells for at auction.
With reaffirmation, the lender gets the best of both worlds: the collateral and your personal guarantee. If you default, they can repossess and sue you for the remaining balance. This is why lenders are so eager for you to sign.
The Risks for Car Loan Reaffirmation
Cars depreciate. Rapidly. The moment you drive off the lot, most vehicles are worth less than the loan balance. When you reaffirm, you lock yourself into paying the full loan amount -- not the car's current value. If something goes wrong (job loss, medical emergency, major repair bill), you could end up owing thousands on a car you no longer have.
Read the full risks of reaffirmation guide for more detail.
Alternatives to Car Loan Reaffirmation
Redemption Under Section 722
Section 722 of the Bankruptcy Code allows you to redeem personal property by paying the creditor the current fair market value of the property in a single lump-sum payment. If your car is worth $8,000 but you owe $14,000, you can keep the car by paying $8,000 and the remaining $6,000 is discharged.
The challenge is coming up with the lump sum. Some companies specialize in redemption financing -- they lend you the money to redeem the vehicle at its current value, then you make payments on the smaller loan. The interest rates are typically higher than traditional auto loans, but the total amount financed is lower.
Surrender
If the car is not worth keeping -- if it is unreliable, if the payments are too high, or if you can find alternative transportation -- you can surrender the vehicle. The lender gets the car back, and any remaining balance is discharged. You walk away with no car but also no debt.
Surrender is often the best financial decision, even though it feels like a loss. A fresh start without a burdensome car payment may be more valuable than keeping a vehicle you cannot truly afford.
Ride-Through (Where Available)
In some jurisdictions, you can simply keep making payments on the car loan without signing a reaffirmation agreement. This is sometimes called "ride-through" or "retain and pay." The theory is that as long as you are current, the lender has no reason to repossess.
The availability of ride-through varies by circuit and has been significantly limited since the 2005 BAPCPA amendments. Some circuits (notably the Ninth Circuit) have been more permissive than others. If your lender does not require reaffirmation and your jurisdiction allows it, this may be the best of all options: you keep the car, you keep paying, but you do not restore personal liability.
Ask your attorney whether ride-through is available in your district.
What to Consider Before Signing
Before you sign a car loan reaffirmation agreement, ask yourself these questions:
- Can I comfortably afford the payments? Not just today -- for the remaining term of the loan. If the payment is a stretch, reaffirmation may set you up for failure.
- Is the car worth what I owe? Check the fair market value on sites like Kelley Blue Book or NADA Guides. If you are significantly upside down, consider redemption instead.
- Do I have an emergency fund? If one unexpected expense could cause you to miss payments, reaffirmation is risky.
- Is the car reliable? If it needs major repairs soon, you could end up paying on a broken-down car you cannot afford to fix.
- What does my attorney say? If your attorney is reluctant to sign the certification, take that seriously. They are putting their professional reputation on the line by certifying the agreement does not impose undue hardship.
The Reaffirmation Hearing
If the reaffirmation agreement creates a presumption of undue hardship (your expenses including the car payment exceed your income), the court must hold a hearing. At this hearing, the judge will:
- Review your income and expenses
- Ask why you want to reaffirm
- Determine whether the agreement is in your best interest
- Potentially deny the reaffirmation if it would cause undue hardship
Judges deny reaffirmation agreements regularly. If the judge denies yours, do not panic. You may still be able to keep the car by continuing to make payments (depending on your jurisdiction and lender), or you can explore redemption.
If You Have Already Signed
If you signed a reaffirmation agreement and are having second thoughts, you may still be able to rescind it. You have until the later of: (1) 60 days after the agreement is filed with the court, or (2) the date your discharge is entered. If that window has not closed, you can cancel by sending written notice to the creditor.