One of the greatest concerns that my clients have about the bankruptcy process is whether or not they’ll be able to keep their car. For most people, the answer is yes. In fact, in the hundreds of cases that I have handled, I have yet to have a client who had to involuntarily surrender their vehicle. When they have done so, it was voluntarily. The typical reason is that they can not afford their car payment. When you surrender you car after bankruptcy, you don’t have to worry about being liable for any money afterwards. Bankruptcy prevents the lender from coming after you.
Car loans are secured debts, which are handled somewhat differently than other debts in bankruptcy. A secured debt means there is collateral (in this case, the car) attached to the promissory note (contract to repay money). The lender holds the title to the car until the promissory note is paid off. The title allows them to repossess the car if you default on the loan. If you don’t file bankruptcy and stop making payments, the lender will sell the car and come after you for any money still owed on the loan.
If you file bankruptcy, the promissory note will be discharged (eliminated) just like any of your other dischargeable loans. You’ll be able to keep your car as long as you keep making payments, but if you stop making payments after bankruptcy, the lender can’t pursue you for any money.
A couple of things will happen after you file bankruptcy on a secured debt (mortgages are other common secured debts). First, the lender will stop automatically pulling payments out of your bank account, so you’ll have to “push” those payments to them. Second, because the promissory note, or loan, has been discharged, they will stop reporting payments to the credit bureaus.
Clients will often ask if they should reaffirm a car loan. Reaffirmation means signing a contract that “revives” the promissory loan. If you sign a reaffirmation agreement and stop paying on the loan, the lender can repossess your car and sue you to collect any money that is owed on the car loan, even after bankruptcy.
Clients will ask about reaffirmation agreements for two reasons. First, the lender tells them that if they don’t sign a reaffirmation agreement, they will repossess their car after the court issues their discharge order. Second, the clients believe that reaffirmation is a good way to rebuild their credit.
I generally advise against reaffirming a car loan, for a few reasons. As a bankruptcy attorney, my job is to help people get relief from their debts; reaffirming involves taking on debt. There are other ways to rebuild credit that involve less risk. The most common way is to apply for a secured credit card. Finally, I am aware of only one lender in Colorado that will follow through with their threat to repossess a car if the buyer doesn’t sign a reaffirmation agreement, and I will advise those clients of that.
Reaffirmation is a bad idea if: your monthly car payment is more than you can afford or your car is older and will likely need major repairs in the near future. If you sign a reaffirmation agreement, and you can’t afford the monthly payments, you will still be responsible for the loan. If your car breaks down, and you can’t afford an expensive repair, you will be stuck with a loan for a car that you can’t drive.
Before you sign a reaffirmation agreement for a car loan, you should talk with an experienced bankruptcy attorney.