SHOULD I REAFFIRM ON MY CAR LOAN?
You own an automobile but still owe a significant amount of money on it.
What should you do next? You have two official choices.
The first is to give surrender the vehicle back to the lender, which wipes out any money you still owe on the car loan.
The second official choice is to reaffirm on the debt. Here, you "reaffirm" or "re-agree" to be responsible for the car loan even though you are filing bankruptcy. This is a special contract which protects the lender because: you are specifically agreeing that the loan is NOT DISCHARGED by the bankruptcy and that you will STILL OWE the balance of the loan.
Nowadays, a bankruptcy Judge has to approve your reaffirmation. If your budget is in the red, or if you don't really need the car (because it's a "toy" like a motorcycle, or you already have several cars), the Judge will probably deny your reaffirmation.
This leads us to unofficial options. The Bankruptcy Reform Act says that you must reaffirm on your car/truck or give it back. But no one forces the lenders to follow this law, and many of them would rather have your money than your car.
This unofficial option is called "retain and pay" in our jurisdiction, and "ride through" in others. With retain and pay, you just keep making your monthly payments but don't sign any legal documents. As long as you stay current on the payments, you get to keep the car or truck. If you later decide you don't want it, you just surrender the vehicle back to the lender. At that point you won't owe any more money.
Most auto dealers have decided to go along with the retain and pay option. Chrysler and Ford, on the other hand, will usually pick up your car if you don't sign the reaffirmation.
The retain and pay option has one more ramification: the car loan will show on your credit report as a charged-off debt. This means you won't get credit for payments made. Also, most lenders will not send you monthly statements. Some will not let you pay online, either. The flexibility of being able to walk away from the debt, though, can more than make up for these problems.
In summary, here are the pros and cons of reaffirming versus retain and pay:
PROS OF REAFFIRMING
- Your payments should be reported on your credit report (good unless you pay late)
- You will receive monthly statements and be able to pay online
- You have the psychological comfort of being in good standing with your lender
CONS OF REAFFIRMING
- You are stuck with the debt until it is paid off
- If you lose your job or the car is damaged and insurance doesn't cover the loss, or if it needs expensive repairs, you will still owe the balance on the loan
PROS OF RETAIN AND PAY
- You are only responsible for the debt if you want to be
CONS OF RETAIN AND PAY
- Your payments won't be reflected on your credit report
- You may not receive statements, or be able to pay online
- There is a small chance that your lender will pick up the car without a reaffirmation
This informational is for general information only, and is in no way intended to create an attorney-client relationship. Depending on where you live, here are large difference in bankruptcy laws and how they are applied. Please contact an attorney knowledgeable in the bankruptcy laws in your state.