Your vehicle in a bankruptcy: should you reaffirm?

A reaffirmation agreement may be necessary to keep your vehicle in a bankruptcy, but you still may not want to sign one

For many in Tennessee, the need to file a bankruptcy is clear. Your debts have grown to the point where you simply cannot repay all of them. You may have suffered a job loss or change of jobs in the last decade, and your income has been greatly reduced.

You may have fallen ill or been involved in an accident, which may have both caused you to incur significant medical bills, from doctors, hospitals and other healthcare professionals, but also forced you to miss work for weeks or months at a time.

Now, you may have recovered and are back at work, but the aftermath from that time follows you like a dark shadow. You would like to file a Chapter 7 bankruptcy to discharge those debts, but you need to keep your vehicle in order to drive to work every day.

Will you lose your car?

If your payments are current on your car or truck loan, you may be worried that you could be forced to surrender your vehicle once you file a bankruptcy. This is unlikely, but you may have to decide that if you must keep the vehicle whether to sign a reaffirmation agreement.

A reaffirmation agreement is a document that you sign that "reaffirms" you obligation to repay the loan connected with the agreement. Some lenders may demand this agreement as a result of your bankruptcy filing. When you file for bankruptcy, if you obtain a discharge, the discharge terminates your personal responsibility to repay that debt.

However, because a lender receives a "security interest" in the vehicle, they are allowed to repossess the vehicle in order to sell it and use the proceeds of that sale to pay down the loan.

Here's the complicated part for lenders

Should you stop making payments and the lender repossesses your vehicle, they have to pay the repo man, pay for shipping the car to an auto auction, pay the costs of the auction and any legal fees necessary during this process.

Because of the rapid depreciation of vehicles after they leave the dealer's showroom, most are worth far less than the remaining balance on their loan. Add to this the costs of the auction and most lenders take a significant loss on every vehicle they repossess and sell at auction.

This is why they want you to reaffirm. Because the reaffirmation agreement is signed after the bankruptcy is filed, it is a new debt obligation and is not discharged by the bankruptcy filing.

So, if the lender has to repossess the vehicle should you fall on hard times again and stop making payments, they can send the deficiency balance, or the difference between what you owe on the loan and their sale price, less their costs of the vehicle at auction, to a debt collector in an effort recover that balance.

Some lenders will permit a borrower to "retain" the vehicle after a bankruptcy. If you are current on all of your payments, they accept the risk that it is better for you to keep the vehicle and hope you keep making payments than accept the certain loss when the repossess and sell the vehicle.

Should you reaffirm?

This is an important discussion you need to have with your bankruptcy attorney. Some lenders, such as Ford Motor Company, insist on a reaffirmation agreement. Some local banks and credit unions may also require the agreement.

It typically must be approved by the bankruptcy judge as being in your best interest and some judges tend not to approve reaffirmation agreements.

If possible, maintaining your payments without a reaffirmation agreement is the best course of action, if your lender will permit. An attorney at Lefkovitz & Lefkovitz can discuss this matter with you and help you decide the best course of action.