Should I Reaffirm the Debt on my Car Loan? Will I be able to Finance a Car After Filing?
It is a common scenario, you are filing bankruptcy stop garnishments, prevent foreclosure, erase credit card debt....the reason isn't important for this discussion. What is important? That you currently own a vehicle with a pretty hefty lien [lien = car loan] against it.
When your creditor gets wind that you are filing, they will contact me.....your dependable Phoenix Bankruptcy Lawyer. See, they will be curious about your intentions regarding your vehicle - and for good reason. As a creditor, they have a stake in the outcome of your bankruptcy.
We have talked previously about the 3 Rs of handling secured property in bankruptcy: Reaffirmation, Redemption and R'Surrender*. This decision is often a tough one for my clients.
*It just dawned on me, "Return" is another R that makes much more sense than R'Surrender. I just might have to use that
See, it is commonly understood by most bankruptcy debtors that their credit score may take a hit after filing. This is especially true for those debtors that have been paying their bills up until filing, just barely scraping by. It is also commonly understood that the ability to finance large purchases, like say snazzy new cars, depends on your credit score.
So, the math seems simple:
1 + 1 = there's no way in heck you are getting a car after bankruptcy. Correct?
Not so fast. This is where I, the experienced Phoenix bankruptcy lawyer, swoop in like superman and clear up any misconceptions.
Let me state this loud and clear: There is no reason to reaffirm a car loan you cannot afford simply because you are worried about your post-petition ability to obtain vehicle financing.
Let me repeat: There is no reason to reaffirm a car loan you cannot afford simply because you are worried about your post-petition ability to obtain vehicle financing.
One more time: There is no reason to reaffirm a car loan you cannot afford simply because you are worried about your post-petition ability to obtain vehicle financing.
Whew! I feel better. In fact, the more you learn about reaffirmation agreements in bankruptcy, they more you will realize that there are measures preventing you from entering into such unmanageable reaffirmation agreements. See, these agreements have sections to enter your monthly income and your monthly expenses. A simple subtraction of latter from the former tells your bankruptcy lawyer and the bankruptcy judge whether you can afford the monthly payments. If you can't, it ain't happening.
Now, let's go back to the discussion on post-bankruptcy car loans. I cannot guarantee anything,* but I can tell you from experience that many of my bankruptcy clients are flooded with financing offers subsequent to filing. This is why.
*Alas, I am simply a bankruptcy lawyer and I have no control over the financing department at your local bank
When you file Chapter 7 bankruptcy, you are barred from filing another for the next 8 years. This means that you will not be able to extinguish personal liability from a car loan purchased after filing bankruptcy during the duration of your average 5 year loan.
What's more, the bankruptcy code is written to allow debtors a fresh start. The most obvious way it does this is by eliminating debt to give debtors a more manageable debt to income ratio. In plain English? If you get rid of some of your bills in bankruptcy, you will have more money at the end of each month...more money that can be used to pay a car loan.
See, these financing companies are smarter than you think.
On a final note, I want to dispel the myth that post-bankruptcy financing will cost you an arm and a leg. Current interest rates are low.....really low. So, even if you are penalized for your bankruptcy filing (which isn't given, by any means), the offered loan terms may still be better than your current rate.
Want an example? A recent bankruptcy client surrendered their vehicle, which was financed at an interest rate of 21.6% They recently informed me that they were flooded with option for financing a vehicle subsequent to filing, and decided on a loan through their current credit union - financed at a mere 5.5%.