SHOULD I REAFFIRM ON MY MOTORCYCLE LOAN?
You own a motorcycle but still owe a significant amount of money on it.
What should you do next? You have two official choices.
The first is to surrender it back to the lender, which wipes out any money you owe on the loan.
The second official choice is to reaffirm on the debt. Here, you "reaffirm" or "re-agree" to be responsible for the motorcycle loan even though you are filing bankruptcy. This is a special contract which protects the lender: 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. Here is where we run into problems. To the Judge, a motorcycle is a "toy". Your bankruptcy is supposed to give you a fresh start, and the Judge doesn’t want you to KEEP debt that you could be discharging. He or she is trying to protect you.
This leads us to unofficial options. The Bankruptcy Reform Act says that you must reaffirm on your motorcycle 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 motorcycle.
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 motorcycle. 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.
Many motorcycle dealers will go along with the retain and pay option. A very few, on the other hand, will pick up your motorcycle if you don't sign the reaffirmation.
The retain and pay option has one more ramification: the loan will show on your credit report as a charged-off debt. This means you won't get credit for payments made. BUT it also means you won’t get dinged for late payments. 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 this.
In summary, here are the pros and cons of reaffirming versus retain and pay:
PROS OF REAFFIRMING BUT THE JUDGE PROBABLY WILL SAY NO UNLESS YOU CAN CONVINCE HER
- Your payments should be reported on your credit bureau (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 cycle is damaged and insurance doesn't cover the loss, or if it needs expensive repairs, you will still owe the balance of the loan.
PROS OF RETAIN AND PAY
Flexibility: You are only responsible for the debt if you want to be.
CONS OF RETAIN AND PAY
- If you can’t stay current on the payments the lender is less likely to work with you.
- Your payments won't be reflected on your credit report.
- You may not receive statements, or be able to pay online. You can avoid problems by copying a recent bill, and sending that in with each payment.
- 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.