If you’re in Chapter 7 bankruptcy and want to renegotiate the terms of your car loan, entering into a reaffirmation agreement with your lender might be the answer. A reaffirmation agreement is a new contract you and your lender enter into voluntarily.
In this article, you'll learn that lenders sometimes agree to new terms when completing a reaffirmation agreement, including lowering the amount owed, interest rate, or monthly payment. A local bankruptcy lawyer can help you with the negotiation process.
Find out more about the cost of hiring an attorney to file for Chapter 7 bankruptcy.
Car Loan Options When Filing for Chapter 7 Bankruptcy
One of your Chapter 7 filing responsibilities includes telling your lender and the bankruptcy court what you want to do with your financed car.
If you don’t need the car or can’t afford the payment, you can "surrender" it and give it back to the lender. However, if the vehicle is essential for work, school, or family commitments and you want to keep it, you might be able to:
- continue paying the car payment without a contract if the lender allows it
- "reaffirm" the loan by entering into a new contract, or
- "redeem" the loan by paying the car's actual value in one lump sum.
A filer who wants to keep a car but also wants better financing will likely choose to reaffirm the loan. Before you decide, you'll want to learn what’s involved in a reaffirmation agreement because when entering into one, you'll give up some of the benefits of eliminating debt in Chapter 7.
What Is a Reaffirmation Agreement?
If you don't want to surrender the car to the lender, you can enter into a new contract with your lender called a reaffirmation agreement. When completing it, you can ask your lender for new car loan terms.
Why Are Reaffirmation Agreements Offered in Chapter 7 Bankruptcy?
If you're paying for your car with monthly payments, filing for Chapter 7 bankruptcy will cancel the contract, along with other obligations for goods and services, such as your credit card agreement, gym membership, and cable TV.
Although most people are happy to get rid of debt, if you don’t pay your car payment, the lender can use its lien rights to recover the vehicle, even when you file for Chapter 7 bankruptcy. A reaffirmation agreement reestablishes your right to keep the car, and some people, but not all, want that security.
Renegotiating a Car Loan During the Reaffirmation Process
When you indicate that you want to reaffirm your loan on the Statement of Intention for Individuals Filing Under Chapter 7 (“SOFA”) bankruptcy form, the lender will send you a reaffirmation agreement with the original loan terms. You'll ask the lender for more favorable terms once you receive it if you hadn’t already approached the lender about renegotiating your car loan.
Keep in mind the lender isn’t required to negotiate with you. Although a lender might consider a new payment amount, interest rate, or another provision, most reaffirmation agreements are typically on the same terms as the prior contract.
If you reach an agreement, the lender will send an updated reaffirmation agreement form.
What Happens If I Don’t Reaffirm My Car Loan?
In some jurisdictions, the bank will allow you to keep the car as long as you're current on the payments and remain current. Because bankruptcy judges don’t want to undermine the benefit of erasing debt in Chapter 7, some courts encourage this approach.
For instance, suppose the car gets destroyed in a personal injury accident. If the insurance pays out less than your loan balance, a contract or reaffirmation agreement will let the bank sue you for a "deficiency judgment" or the difference between what the insurance pays and the car's value.
However, you don't necessarily need a reaffirmation agreement. Because lenders are in the business of collecting money, not cars, many will be willing to forego the ability to get a deficiency judgment if you continue sending in monthly payments.
Still, you'll want to consider the following factors before proceeding without a reaffirmation agreement:
- You could lose the car. The lender can take back the property anytime, even if you're current on payments.
- Your timely payments won't bolster your credit rating. As you emerge from bankruptcy and begin to rebuild your credit, you'll want credit bureaus to see evidence of your financial health, such as a pattern of regular, on-time payments. But without a reaffirmation agreement, your lender won't report your payment history to the credit bureaus.
It's important to understand that the rules in your state might be more complicated than the general concepts discussed here.
Will a Reaffirmation Agreement Protect Me?
Yes, it’s possible. As mentioned above, some people prefer a contract's security because you and the bank lose certain protections without one. Here’s how a reaffirmation agreement can benefit both parties.
- Protection for the bank. The lender can sue you for a deficiency judgment if you fail to pay the entire loan balance for any reason.
- Protection for you. The lender can’t take back the property unless you fail to make your payment. But you could be liable for a deficiency balance if you stop making payments or the car gets damaged without sufficient insurance coverage.
Can I Reaffirm a Car Loan After Discharge?
You must complete the reaffirmation agreement during your Chapter 7 case and have it approved by the bankruptcy judge for it to be valid. Once the bankruptcy court closes your case, you won’t be able to enter into a reaffirmation agreement.
What Happens If I Default on a Reaffirmed Car Loan?
The lender would likely repossess your car. Also, you’d probably be responsible for paying a deficiency balance if the lender sold the car for less than the loan balance.
Does Reaffirming a Car Loan Help Credit?
It can help you rebuild your credit if you pay your monthly payments on time. Because a reaffirmation agreement forms a new contract between you and the lender, the lender will report your payments to credit bureaus.
Is “Redemption” Another Way to Lower a Car Payment in Chapter 7?
If your car is worth less than what you owe, you might be able to “redeem” the loan and pay the actual value. You’ll ask the court for permission by filing a motion. If your loan qualifies and the bankruptcy court grants your request, you’ll pay the lower amount in one lump sum.
Some Chapter 7 filers borrow the funds from a friend or family member. Others borrow money from redemption lenders if the interest rate is low enough for redemption to be worthwhile.
What to Consider Before Reaffirming a Car Loan
Not everyone is a good candidate for reaffirmation in Chapter 7. If you risk losing your car because you can’t protect your car equity or are behind on payments, consider filing for Chapter 13 instead.
The following questions can help you determine whether the Chapter 7 trustee appointed to your case will sell your car or if the lender might seize it.
Can You Protect Your Car’s Equity?
You can skip this step if you owe more on your car loan than what the car is worth. If not, figure out whether you can protect all of your car equity with a bankruptcy exemption. If you can't fully cover the equity, the bankruptcy trustee assigned to your case will:
- sell the car
- return any exempt equity to you, and
- use the remaining proceeds to pay creditors.
But that's not all. Even if the equity is safe, you'll still have to meet other requirements.
Are You Behind on Your Car Payments?
You need to know that if you’re behind when you file for Chapter 7 bankruptcy, there's no guarantee that you'll be able to keep your car because your creditor has the right to take back your vehicle if you're behind on your payments. You can ask, but your lawyer can’t promise you’ll be successful, and most people aren’t willing to assume that risk.
If you’re one of the many who can’t afford to lose your car, Chapter 13 bankruptcy provides a better solution because you can bring current arrears over three to five years.
How to Reaffirm a Car Loan in Chapter 7 Bankruptcy
You can start negotiating when you receive the reaffirmation agreement, or if you'd like to speed up the process, contact the lender as soon as you file your bankruptcy petition.
Don't worry that you might offend the bank when asking for better loan terms because people regularly try to negotiate for lower rates. However, you should be aware that the lender isn’t under an obligation to negotiate with you. Because reaffirmation agreements are voluntary, most include the same conditions as the original loan.
Even so, a lender will occasionally agree to new terms, especially if taking back the car will cause the bank to lose money. Here are a few things you might want to ask the creditor to do:
- forgive missed payments
- lower the interest rate
- waive late fees
- add or delete a cosigner, or
- change any other term.
Your Attorney Can Approve the Reaffirmation Agreement
Once you and the lender reach an agreement, your bankruptcy attorney (or the bankruptcy judge if you don't have an attorney) must certify that you can afford the agreed-upon monthly payment and that it won’t cause undue hardship to yourself or your family.
Determining whether payments under your reaffirmation agreement will pose a hardship usually involves comparing your responses on two bankruptcy forms: Schedule I: Your Income and Schedule J: Your Expenses.
Example. Maggie filed for Chapter 7 bankruptcy to discharge a significant amount of credit card debt and medical bills because she didn’t have enough money to cover her debt. Because Maggie has more disposable income after eliminating her monthly credit card payments, her attorney can certify that the car payment won’t impose an undue hardship.
When the Judge Must Review Your Reaffirmation Agreement
If your lawyer won't sign the reaffirmation agreement or if you don't have a lawyer, you and your lender can still file the reaffirmation agreement with the court.
At a court hearing, the judge will ensure that you understand:
- the payment terms
- the lender has the right to foreclose or repossess the property if you fail to live up to the promises in the reaffirmation agreement, and
- the lender has the right to sue you for a deficiency judgment.
The judge will likely approve the reaffirmation if you understand what you’re giving up and the payments won’t cause undue hardship.
Filing the Reaffirmation Agreement With the Court
You must file the reaffirmation agreement with the court before the case ends. If you wait too long, your lender can disregard the reaffirmation agreement and take back the car.
If you're unsure you can meet the quick timeline, a bankruptcy lawyer might be able to help negotiate the reaffirmation agreement on your behalf.
Questions for Your Attorney
- Can I reaffirm a loan if I'm the cosigner?
- What happens if I can't make my reaffirmation agreement payments?
- Can I still make payments and keep the car if a reaffirmation agreement isn't on file before the discharge date?