When you file for Chapter 7 bankruptcy, the key benefit is that many unsecured debts are discharged. That means you are no longer legally responsible for paying them. However, you cannot simply discharge a secured debt and keep the property that serves as security for that loan.
This issue arises most often in connection with automobile loans, and that’s no surprise: 31% of the population of Clark County has at least one automobile loan. Those cars are rarely expendable. In its 2018 list of tips for those considering moving to Las Vegas, SmartAsset called it “very much a driving city,” attributing the need for an automobile to the area’s increasing “sprawl.” And, Nevada appeared in the top 10 on a recent listing of states with the most automobile loan debt.
A Chapter 7 bankruptcy petitioner who has a secured automobile loan must take action in the bankruptcy case to resolve that debt. The three options a debtor has for managing a secured automobile loan in Chapter 7 bankruptcy are to surrender the vehicle and discharge the debt, to “redeem” the vehicle by making a lump sum payment, or to “reaffirm” the debt by entering into a new agreement with the creditor.
How Does Reaffirmation Work?
When a bankruptcy petitioner wants to reaffirm automobile loan debt, he or she must enter into a new agreement with the lender. Of course, the bankruptcy filers’ attorney will typically handle negotiation of this agreement. However, not every bankruptcy petitioner with an automobile loan is eligible to reaffirm in bankruptcy.
One obstacle to reaffirmation is when the bankruptcy petitioner is already behind on automobile loan payments. In this situation, the lender may opt not to negotiate a reaffirmation agreement. Instead, the lender may petition the bankruptcy court for relief from the automatic stay and proceed with repossession of the vehicle.
Another possible roadblock involves the debtor’s ability to pay. Many people are understandably very uneasy about the prospect of losing their cars, and so may be inclined to enter into a reaffirmation agreement even if they are uncertain about being able to keep up the payments. However, the bankruptcy court must approve any reaffirmation agreements. And, the court will not approve a reaffirmation agreement if it appears that the debtor cannot afford the terms of the agreement.
If the bankruptcy petitioner is represented by an attorney, initial responsibility for assessing affordability of a reaffirmation agreement lies with the attorney. If the attorney determines that the debtor can afford to make the payments under the reaffirmation agreement, and signs off on the agreement, the bankruptcy court will typically approve the reaffirmation agreement without a hearing. However, if the petitioner is not represented, or the bankruptcy attorney does not approve the reaffirmation agreement, a hearing will usually be required.
Is Reaffirmation a Good Idea?
Whether or not it is a good idea to reaffirm an automobile loan or other secured debt in a bankruptcy case depends on a variety of factors. For example, one thing the debtor should consider is the value of the item in comparison with the payments that would be required under a reaffirmation agreement. If the debtor will end up paying significantly more than the automobile is worth through a reaffirmation agreement, it may not be the right step. However, retaining an automobile is critical to many people who are considering bankruptcy. Therefore, it is also important to weigh-in the importance of keeping a car, and the debtor’s other options for obtaining a replacement vehicle in the absence of reaffirmation.
Reaffirming allows the debtor to retain the vehicle, which is the obvious motivation for reaffirming. However, reaffirming an automobile loan also puts the debtor at risk.
Without a reaffirmation, the debtor’s personal liability for the outstanding debt is discharged. However, when the debtor enters into a reaffirmation agreement, he or she is agreeing to remain responsible for payment after the bankruptcy. That means that if it turns out he or she cannot keep up payments on the loan, the vehicle can be repossessed, and the debtor will be responsible for any deficiency balance after the automobile is sold at auction.
In addition, the post-bankruptcy repossession and deficiency judgment collection will create new negative entries on the debtor’s credit report, just when he or she is attempting to rebuild a stronger credit history in the wake of a bankruptcy case.
Is It Possible to Keep a Car in Chapter 7 Bankruptcy Without Reaffirming or Redeeming?
In some cases, it is possible to simply keep the car and continue making payments. This option is generally not available when the automobile loan is already delinquent at the time of filing. And, many large automobile lenders will not allow a bankruptcy petitioner to keep the car and continue making payments. Rather, they will proceed with repossession in the absence of a reaffirmation agreement or redemption.
Even where this option is available, there are some downsides. For example, a lender typically will not report those post-bankruptcy payments to the three major credit reporting agencies. That means that automobile loan payments will not appear as current on your credit report to help you rebuild. The other, more significant, downside is that the creditor technically retains the right to repossess at any time. Although most lenders will not do so as long as the borrower continues making payments, there is no legal or contractual reason the lender cannot choose to repossess.
Finding the Best Approach for You
Clearly, there are many factors to consider when determining whether to reaffirm an automobile loan in Chapter 7 bankruptcy. An experienced bankruptcy attorney like the ones at Haines & Krieger can help you weigh those factors and determine the best solution in your particular circumstances.
You can schedule a free consultation right now by filling out the contact form on this page.