Last time, we were discussing a reaffirmation agreement in a Chapter 7 bankruptcy. This agreement allows you to keep a vehicle by “reaffirming” the terms of the loan. To be eligible for this agreement, you typically need to be current on your payments and capable of making the remainder of the outstanding payments of the loan.
The problem with a reaffirmation agreement is that unless the lender agrees to significant concessions on the interest rate or the balance of the loan, it is typically not in the best interests of a debtor to reaffirm.
Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, debtors could often “retain” a vehicle, which was viewed as a better option for most debtors. With retention, a debtor only had to be current on their payments and continue making those payments and the lender was not allowed to repossess the vehicle merely because of the bankruptcy.
The changes in the 2005 law, made with the vast lobbying power of the lending industry, pushed to eliminate this option. This left reaffirmation for most debtors. However, to reaffirm, both your bankruptcy attorney and the bankruptcy judge must sign off on the agreement as being in your best financial interest.
This may be difficult because the truth often is that you would be better off purchasing a less expensive vehicle after your bankruptcy. While it may not be as ideal as what your are driving currently, it is likely to be far less expensive, even if you need to obtain a relatively expensive loan for the vehicle purchase.
You should discuss this issue with your attorney and carefully work through the numbers. Because of the tremendous speed with which vehicles depreciate, you may obtain a vehicle at a price that helps you recover faster from your bankruptcy than if you had continued making higher payments on a more expensive vehicle.
By doing this, you also obtain the full value of your bankruptcy discharge; any deficiency balance on that loan is uncollectable, and on the bright side, will likely force your lender to take a multi-thousand dollar loss on the return and auction of your former vehicle.
