Should I sign a reaffirmation agreement for my car loan?

First, make sure you understand what a reaffirmation agreement is.  Check out our Blog titled, “What is a reaffirmation agreement?”

Signing a reaffirmation agreement has serious implications so it’s wise to consider all of your options before entering into a reaffirmation agreement.  Reaffirmation agreements are voluntary and are not required to keep possession of a car.  If you do want to keep the car, however, you must stay current on the loan payments as a default will allow the finance company to repossess the car.

RISKS OF SIGNING A REAFFIRMATION AGREEMENT

If you reaffirm a debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy filed.  This can have serious financial consequences on your future since you will continue to be legally responsible for paying the loan back.  After signing a car lender’s reaffirmation agreement, not only will the debt not be discharged – and if you then default on the loan, the creditor can take action to recover the collateral,  your vehicle.  This means that if you are unable to keep up with your car loan payments in the future because of loss of income, illness, damage to the vehicle itself, or any other reason, the lender can 1) take legal action to repossess the car, 2) sell the car to someone else (usually, at auction), and 3) sue you for the money you may still owe (deficiency balance).

It is also important to note that reaffirmation agreements must be approved by the bankruptcy court and typically require the debtor to show that they can afford to make the payments required under the agreement.  The bottomline is that signing a reaffirmation agreement is voluntary and may not be in your best interest.

REASONS TO CONSIDER A REAFFIRMATION AGREEMENT

Even if a debt can be discharged, you may have special reasons why you want to promise to pay it.  Three possible reasons why you may consider a reaffirmation agreement are:

1. Helpful to Rebuilding Credit. Signing a reaffirmation agreement and keeping the loan payments current can help rebuild your credit rating after bankruptcy.  This is because the reaffirmed loan will continue reporting on your credit report (while all your other debt that is discharged will no longer report).  Having a timely-paid installment loan reflecting on your credit report can be helpful to increasing your credit score.  There are, however, other ways to build credit after bankruptcy, such as on-time payments to student loans, obtaining a new auto loan, and responsible use of secured and unsecured credit cards which are obtainable after bankruptcy. 
2. You have a cosigner on the debt.  If you have a cosigner on the loan, such as a parent or friend, that person will continue to remain liable on the debt. You may not want to leave that person responsible for repaying the account upon the conclusion of your bankruptcy proceeding. Since you may also voluntarily pay back a debt that has been discharged, you do not need to sign a reaffirmation agreement.  Instead, you may just repay the debt or repay your friend for it.
3. Improved Finance Terms.The terms of a reaffirmation agreement may be negotiated to your advantage.  For example, after negotiation and in exchange for signing the reaffirmation agreement, a finance company may agree to reduce your balance owed, lower your interest rate, or extend your term to reduce your monthly payment.

Summary. Reaffirmation agreements are under special rules and are voluntary.  They are not required by bankruptcy law or by any other law.  Further, they must be approved by the bankruptcy court and typically require the debtor to show that they can afford to make the payments required under the agreement.

Finally, unless the terms of the secured loan can be significantly improved for your benefit – in exchange for signing a reaffirmation agreement – we generally do not recommend signing them.

In any case, it is crucial that you discuss your specific circumstances with an experienced bankruptcy attorney to identify if there may be any benefit to you entering into a reaffirmation agreement.

The California bankruptcy attorneys at DiMarco Warshaw, APLC are looking out for your best interests.  We’ll use our skill and experience to help you determine whether or not there are sufficient benefits for entering into a reaffirmation agreement.  

To speak to one of our attorneys who will help you with solutions to your specific circumstances, schedule a free phone evaluation here https://calendly.com/dimarcowarshaw/20min or call us directly at 888-890-5474.