Reaffirming a car loan after Chapter 7 bankruptcy
If you are dealing with unmanageable debt, Chapter 7 bankruptcy may be an excellent way for you to eliminate that debt and get back on your financial feet. However, there are a few drawbacks to a Chapter 7 filing. Your credit score may take a hit, and it will probably take some time for it to recover. In addition, if you have any secured debt such as a car loan, you may have to give up the car or other item that is securing that debt in order to have the debt forgiven.
However, there may be an option for people who want the benefits of Chapter 7 bankruptcy but who also wish to keep their vehicle. Some lenders may allow you to modify or reaffirm your auto loan, allowing you to maintain possession of your car and, ultimately, pay off your debt in part or in full.
A reaffirmation agreement is a legally enforceable contract made with your auto loan lender in which you agree to pay off the debt that would have otherwise been discharged in bankruptcy. You must file the agreement with the bankruptcy court, which will give your lender the right to file suit against you if you do not make your agreed-upon loan payments.
It is generally best to reaffirm your car loan only if you owe more on the vehicle than it is worth. If you have equity in the car, it may not be the best idea for you. In some situations, however, reaffirmation agreements are mandatory. The first step is to check with your lender to determine whether this is the case.
Source: Fox Business, “Should I Reaffirm Car Loan After Bankruptcy?” Justin Harelik, Aug. 14, 2012