Today's Topic

Car Loans and Reaffirmation Agreements

If you have a car loan when you file bankruptcy, your lender is going to want you to either:

· Reaffirm the loan agreement;

· Surrender the car; or

· Redeem the car

When you file bankruptcy, if you surrender your car, the full amount that you owe is discharged by the bankruptcy, even if you owe more than the car is worth. If you reaffirm the loan, you are entering into a new agreement for the full amount that you owe, which will be enforceable after the bankruptcy, even if you quit making payments.

For example, if you owe $25,000 on a car that’s only worth $19,000, if you reaffirm the loan, you’re agreeing to pay the full $25,000 no matter what happens to the car, or to your ability to pay. If you can negotiate better terms, like a lower interest rate, and there’s not a large difference between the value and the loan amount, reaffirmation may be a good deal for a debtor.

A reaffirmation agreement must be approved by the Bankruptcy and most judges will try to discourage the reaffirmation.

Redeeming the car means that you pay the lender the value of the car, in a lump sum, and you keep the car. This may be a good option if you can refinance the car. In this market, however, most refinancing carries a pretty hefty interest rate that might raise the monthly payment.

If you live in California, you do not have to choose. Calif. Civ. Code Section 2983.3 provides that, so long as you keep making payments, you don’t need to reaffirm that loan and the lender cannot repossess it. I don’t know if this option is available in any other state.

What’s the bottom line? Your car is probably a necessity. But if it’s old and not worth much, do you want to obligate yourself to pay your lender more than it’s worth? Maybe. Maybe not. Only you can make that decision. But it’s worth exploring your options.

If you surrender the car, can you buy a few one with a bankruptcy on your record? You’d be surprised how easy that can be. You can wait until after you file to make up your mind. It’ll take the lender awhile to force the issue. Shop around and see if you can find a car and a loan that you can afford. But if you owe more than the car is worth, do everything you can to avoid reaffirmation, and do not trade the car in if you can’t get enough to pay off the old car because the deficiency might be added onto the new loan (the last thing you want).

A local bankruptcy attorney can advise you on the law that applies in your area. Most offer free consultations.

Tip for the Day: If you’re contemplating bankruptcy, pull your free credit report and see what’s on it. You’ll need a complete list of creditors when you prepare your petition.

Next Week’s Topic: Bankruptcy Timeli