If you have a car loan and you file Chapter 7 bankruptcy, you must tell the court what you intend to do with the loan. You have three choices - redeem, reaffirm, or surrender. This article discusses one of those options -- reaffirmation. If you reaffirm your car loan, will agree to continue making payments and keep the car.
To learn about your other options -- redeeming the car by paying the car's value to the lender, or surrendering the car (giving it back) to the lender -- see the articles in Your Property in Chapter 7 Bankruptcy.
Reaffirming a Car Loan
Reaffirming the debt on your car means that, despite your bankruptcy, you will keep the car and continue to make payments, remaining fully responsible on the debt.
In order to reaffirm you car loan, you must sign a reaffirmation agreement. This is a contract that lists the full balance that you are agreeing to reaffirm, as well as the interest rate and the monthly payment. The agreement will require you to attest to the court that reaffirming the debt will not present an undue hardship to you. That means that even with the car payment, you can still afford to pay your other reasonable and necessary expenses.
Usually, the car lender will provide you with a reaffirmation agreement either before your meeting of creditors or at the meeting itself.
Changing your mind. If you change your mind after you sign the agreement, you have 60 days from the date you signed the agreement or any time before the court enters your bankruptcy discharge, whichever is later, to rescind (cancel) the agreement. For example, if you sign a reaffirmation agreement on May 1 and change your mind 62 days later, you can rescind the agreement if the court has not yet entered your discharge. Or, if you sign the agreement and the court enters your discharge 12 days later, you cannot rescind the agreement, and you are bound by it.
Effect of Reaffirmation
Reaffirming your car loan means that you are fully responsible for the payments as if you had not filed bankruptcy. This means that you have no recourse if you default down the road. If you lose your job six months later and get behind on the payments, the lender can repossess the car.
You are responsible for any deficiency. If the lender repossess the car, it will sell the car at auction and you will be responsible for the difference between what you owed on the car and what it sold for (this is called the deficiency.)
Example. You reaffirm your car loan during bankruptcy, but then later default on your car payments. You owe $10,000 on the car. The car lender repossesses the car and sells it at auction for $7,000. The $3,000 difference is called the deficiency balance, and you are responsible for it - if you don't pay it, the lender can sue you and obtain a judgment. And you won't be eligible for another Chapter 7 discharge for eight years.
Rescinding the Reaffirmation Agreement
If you choose to rescind the agreement, you will have to file a formal rescission and notify the lender. The form of the rescission and the manner of its execution will depend on the local rules of your bankruptcy court. Once you formally rescind the agreement, the creditor will repossess the car, but you will not be responsible for any balance due. The lender will be required to return to you any payments you made after the bankruptcy was filed, and you have no further responsibility for the car.