Should I Reaffirm My Car Loan?
What is a Reaffirmation Agreement?
Reaffirmation agreements concern debts you owed prior to your bankruptcy filing. They are most commonly associated with car loans but can also affect credit cards, home mortgages, and other types of debt.
The reaffirmation agreement is basically a contract that replaces the original loan agreement. When you sign the reaffirmation agreement, you are agreeing to remain personally liable on a particular debt that would have otherwise been discharged in your bankruptcy. This means that if you later default on the debt, the lender can hold you personally liable for a deficiency. A deficiency is the amount of the debt not paid by the repossession sale.
Use the following car loan as an example. Assume the car is worth $8,000.00 and you owe $12,000.00. You sign the agreement and then default 2 months later (assume that the value and amount owing have not changed). The lender repossesses the care and sells if for $8,000.00. That still leaves $4,000.00 owing. The lender can then sue you for the $4,000.00 deficiency. If you had surrendered the car to the lender instead of signing the reaffirmation agreement, you would not be liable for the deficiency because the original vehicle loan was included in the bankruptcy. However, the reaffirmation is a contract entered into after the bankruptcy filing and therefore is not included in the bankruptcy.
Should I sign the Reaffirmation Agreement?
The answer to this question is “it depends." Currently, debtors are required to sign reaffirmation agreements for personal property that is collateral for a debt that the debtor does not want to redeem. Creditors are allowed to repossess the collateral 30 days after the 341 meeting of creditors if the reaffirmation agreement is not signed—regardless of whether the payments are current.
Here are some factors to consider when deciding whether or not to sign a reaffirmation agreement on a car:
1. Do you owe more on your car than it is worth?
If so, you should consider letting the car go. If the car is in an accident and is a total loss, you insurance may only pay the value of the car, leaving you owing the difference to the lender. You will still be liable for this deficiency.
2. Can you afford the monthly payments?
You really need to be honest with yourself. You are in bankruptcy because you expenses are greater than your income. If you feel there is a chance in the future that you will not be able to afford the payments you may want to consider letting the car go.
3. How long will it take to pay off the remainder of the loan?
The number of payments remaining on the loan will factor into your decision. For example, if your car will be paid off in six months, it may be a good idea to reaffirm the vehicle. If there are still five years remaining on the contract, you should consider surrendering the vehicle. A lot can happen in five years.
4. Is there a cross collateral agreement with the lender?
Cross collateral agreements link all of your debts and the underlying collateral to each other. For example, suppose you have a credit card account and car loan with the same lender. A cross collateral agreement will tie the credit card to the car and the car to the credit card. If you pay off the car and still owe on the credit card, the lender doesn’t have to release the lien on the vehicle until you pay off the credit card. This can even happen if you file for bankruptcy to discharge the credit card debt because cross collateral agreements survive bankruptcy. However, the reaffirmation agreement can present an opportunity. Some lenders will agree to waive cross collateral agreements as part of the reaffirmation—just remember to ask.
Does My Attorney Have to Sign the Reaffirmation Agreement?
You attorney has to sign off on the agreement to avoid a hearing. However, some attorneys refuse to sign the agreements to protect the debtor. How does this protect you? If the attorney refuses to sign the agreement the judge will hold a hearing to determine if the reaffirmation agreement is in your best interest. Many judges also refuse to approve or disapprove the agreement to protect the debtor. If the judge does not approve or disapprove the agreement at the hearing, you keep the vehicle as long as you keep making the payments and keep it insured. Since the judge did not approve or disapprove the agreement, the creditor cannot take the collateral unless you default. But more importantly, since you jumped through the legal hoops of attempting to get the agreement approved, the lender cannot sue you for a deficiency if you later default.
Can I Change My Mind After Signing the Reaffirmation Agreement?
You can cancel (rescind) the reaffirmation agreement as long as you notify the creditor before (1) the court grants your discharge, or (2) 60 days after the reaffirmation agreement is filed with the court—which ever occurs later.
Debtors should consider all of the risks and consult with their attorney before deciding to sign a reaffirmation agreement.