On Monday, I discussed what happens when a debtor surrenders an automobile as part of filing Chapter 7 bankruptcy. As I said, the biggest drawback of going that route is that the individual will then have to find a different form of transportation. For a number of my clients, giving up their vehicles would only make life more difficult. Fortunately, one option for such clients is reaffirmation.
By reaffirming a car loan, the debtor agrees to be responsible for the debt as though he or she did not file bankruptcy. This option can be preferable to surrendering a vehicle because the debtor will not have to obtain a new loan on a new automobile with new terms. Instead, reaffirmation allows the debtor to secure the interest rate and payment instead of surrendering the vehicle and obtaining a new vehicle at much higher rates, usually financed through a subprime lender.
To reaffirm a car loan, the debtor will not only have to demonstrate that he or she needs the automobile, but also that the payment is reasonable. The debtor will sign an agreement with the lender that indicates he or she will continue to pay for the car, and the debtor can cancel (rescind) the agreement if he or she decides that it would be better to give the car back without paying for it. However, the reaffirmation must be cancelled within 60 days after it is signed or before the court enters the discharge, whichever is later.
The risk a debtor takes in reaffirming a car loan is he or she is liable for the auto loan, meaning that if the debtor misses payments after the bankruptcy discharge and the lender repossesses the vehicle to sell at auction, the debtor will still be responsible for the deficiency balance and any auction fees. A debtor who is considering Chapter 7 and wants to keep a car or truck but has concerns about being able to make monthly payments still has one more option available for retaining his or her automobile. On Friday, I will talk about how the process of redemption works in Chapter 7 cases.