What Does Reaffirming a Car Loan Mean?
When you file for Chapter 7 bankruptcy protection, you may face the decision of what to do with a vehicle for which you still owe money. One possibility is to continue to repay your loan under the terms of a reaffirmation agreement. Such an agreement presents some advantages and disadvantages, and there are other options to consider.
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Identification
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Reaffirming a car loan is the process of legally acknowledging your intention to continue to pay the loan after bankruptcy. In essence, a reaffirmation agreement re-establishes your liability for repaying what you still owe on the vehicle. According to Bankrate.com, lenders require the borrower to sign a reaffirmation agreement as a condition of keeping the vehicle about 65 percent of the time, so you may not have a choice in the matter if you wish to keep the vehicle.
Benefits
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The obvious benefit of signing a reaffirmation agreement is that you get to keep your vehicle, which may be a necessity for getting to work and maintaining your lifestyle. If you choose not to reaffirm, the lender has the right to repossess your vehicle and sell it at auction. You would then be liable for any deficiency, which is the difference between what the lender receives when selling the vehicle and what you still owe on your loan. The lender has the right to sue you to collect the deficiency amount. Another benefit is that if you make timely payments after reaffirming, it can help rebuild your credit score.
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Drawbacks
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On the other hand, signing the reaffirmation agreement means you are still on the hook for making payments on the vehicle, and the lender may require you to pay the full amount you owe. If the amount you owe is far greater than the actual value of the vehicle, the result is a losing financial proposition. If you default on the payments, the lender still maintains the right to repossess the vehicle.
Alternatives
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Instead of reaffirming the loan, another option is to simply return the vehicle to the lender at the conclusion of the bankruptcy proceedings. Under bankruptcy law, any remaining debt is discharged and you are not liable for any deficiency. If you want to keep the vehicle, the Santa Clara University website indicates that in some jurisdictions you may be entitled to pay the lender its current market value in a lump sum without being liable for any deficiency. You may also be able to work out your own payment arrangement with the lender without entering into a formal reaffirmation agreement.
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References
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