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You Can Keep a Car in Bankruptcy, But Under What Terms?
In our current tenuous economic climate, more and more normal, honest, hardworking people are turning to bankruptcy for relief from overwhelming debt. In fact, most people who file for bankruptcy are perfectly responsible citizens who have lost homes, lost law suits, incurred unexpected medical bills or other large, unforeseen expenses. One of the most commonly held beliefs about the bankruptcy process is that by filing, you will automatically lose your car. This is simply not true. If you want to keep a car you are still paying for, you will have to give up some of the very benefit your bankruptcy discharge gives you.
To keep a car on which you are still making payments, you’ll have to sign an auto loan reaffirmation agreement with your auto lender.
An auto loan reaffirmation agreement is a new, legally binding contract, entered into after you file bankruptcy. Our lawyers will review this agreement and honestly tell you whether we believe it is in your best interest. In this agreement, you promise to repay the car loan instead of having it discharged. While a bankruptcy discharge would have relieved you of your legal obligation to make payments on your vehicle, if you decide to keep the car, you will give up that protection. You agree to again become legally responsible for the car when you sign auto loan reaffirmation agreements in bankruptcy. Whether this is in your best interest depends on the value of the car, the amount of the monthly payments, whether you can reasonably afford to make those monthly payments, how much you still owe on the loan, the interest rate, and other factors.
Are You Underwater on the Car?
The most important item to keep in mind is that if you owe significantly more than the car is worth, and if you sign a reaffirmation agreement and then later default, the lender will be able to not only repossess the car but also sue you for the balance of what you owe on the loan after subtracting what the lender gets for the car at auction. Your bankruptcy discharge will have no effect on this, because by signing the reaffirmation agreement, you waived its protection as to the car loan.
When a Reaffirmation Agreement Makes Sense
A reaffirmation agreement can make sense, however, when you have a low balance on your car note, you don’t have another option for transportation or you don’t want to hurt a co-signer’s credit. This agreement also helps you rebuild your credit following bankruptcy because the payments will be reported to the credit bureaus. After the bankruptcy, your credit report will show that your account with the lender is current.
Moreover, if a debtor refuses to state his or her intention to reaffirm an auto loan (or redeem the car — i.e., pay off the loan), as required by Bankruptcy Code section 521(a)(2)(A) within 30 days of filing a voluntary Chapter 7 petition, then pursuant to section 362(h), the Automatic Stay protecting the bankruptcy debtor from collection activities such as repossession while the case is pending, automatically terminates, and the lender may repossess the vehicle. This, of course, is an extremely negative consequence for the debtor who does not state his or her intention early on in the case to reaffirm the auto loan and follow through by signing a reaffirmation agreement.
Nevertheless, reaffirmation agreements are often not a wise thing for a debtor to sign. Where there are several years left on the loan, the debtor’s monthly income is insufficient to comfortably make the car payment and/or the loan balance is significantly more than the depreciated value of the car, it may make far more sense for the debtor to surrender the vehicle rather than to expose him- or herself to the possible future liability for a lawsuit after a repossession of the car.
If you are filing for bankruptcy, you need to consult with an experienced debt attorney. If you visit our office, we will help you understand your options and help you avoid making bad decisions that you may later regret. To learn more about auto loan reaffirmation agreements in bankruptcy, contact one of our attorneys to see if this is the best option for your situation.
The Maryland Bankruptcy Center helps people file for bankruptcy throughout the state of Maryland. Our main office is located in Glen Burnie, but we service clients who reside in Baltimore, Columbia, Silver Spring, Essex, Dundalk, Parkville, Towson, Catonsville, Elkridge, Arbutus, Pasadena, Annapolis, Severna Park, Arnold, Severn, Odenton, Pikesville, Randalltown, Owings Mills and Ellicott City. E-mail us at firstname.lastname@example.org or call us today at (410) 766-4044 for your free consultation. We are Bankruptcy Lawyers who help you eliminate your debt and save your home.
David L. Ruben, Esquire
Maryland Bankruptcy Center