Reaffirmation Agreements: Keeping Your Car Post-Bankruptcy

Welcome to Bankruptcy.blog with today’s blog post and podcast recording focusing on filing for Chapter 7 bankruptcy and how that affects your car loan. Whether or not you can keep your car depends on the equity in your car. For example, if there’s negative equity, the bankruptcy trustee isn’t going to want your car. But there’s also the issue of reaffirmation agreements.

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Bankruptcy and Car Loans

There’s no denying that we all want and need our cars. Some of us, like me, even have love affairs with our cars. So our beloved cars are more than just a method of transportation. It reminds me of one of my clients who said, “Not having a car is like not having a pair of shoes.”

We need our cars to take the kids to school—their extracurricular activities such as sports, soccer, football, baseball, etcetera. Your daughter wants to attend piano class, ballet, or whatever your family and kids enjoy doing. But without our cars, we are at a standstill. We can’t do anything.

So, of course, what happens with your car if you file for bankruptcy is an issue. So, today’s topic will give you a better understanding of your options when you file for bankruptcy and have a car.

Does Your Car Have Any Equity?

You first need to figure out how much equity your car has. I’ve discussed that exemptions control your case in several videos and blogs. Exemptions determine what assets you get to keep.

Chapter 7 bankruptcy is known as a liquidation, and while that sounds like you’re losing everything, that’s not the case because of exemptions. Exemptions do vary per state. For example,  if your state has an exemption of $5000, your car’s first $5,000 of equity is protected. If you have negative equity, there’s nothing to worry about.

So let’s start with Florida, which had horrible car protections at $1,000, but recently, it was increased to $5000.

Ask yourself what your car is worth and how much is owed on the car loan. Once you figure that out, apply your state’s exemption amount. If there’s any money left over, then that decides your next step. Without equity, the bankruptcy trustee doesn’t want your car. But what if $5,000 is nonexempt? Now what?

• The Bankruptcy Trustee Abandoned Your Car. Is that a Good Thing or Bad?

Well, you can buy back the nonexempt portion from the trustee. Clients aren’t always thrilled about paying back x amount but look at this from a different perspective.

If, for 5,000, you are wiping out $50,000, that’s a good deal. That’s always a win-win situation. Don’t look at it as buying back your car, but as taking those steps towards a fresh start and eliminating your debt so you can move on with your life.

If equity is an issue and you file Chapter 7 bankruptcy, the trustee will give you 10 to 12 months to pay that amount back. If you can’t afford to pay it, then what?

If you knew the equity issue in advance, you could file Chapter 13 bankruptcy and pay back the nonexempt portion over 36 to 60 months. However, you can surrender the vehicle if you file Chapter 7 bankruptcy and can’t afford to buy back the nonexempt portion. I’ll give you an excellent example of how that may be to your benefit based on one of my cases.

The bankruptcy trustee valued the car at a ridiculous price. My client’s car had  70,000 miles more than when he bought it. The vehicle was involved in a car accident and had mechanical issues.

My client said it did not make sense financially to buy back the car. He preferred to use that amount as a down payment on a new car. So he surrendered the car, eliminated all his debt, and used a cosigner to buy a brand-new vehicle. So, it depends on the facts of your case and your situation.

Now, going back to negative equity. The bankruptcy trustee is moving on. That is at least one good thing about cars: that they lose their value quickly. So, negative equity is going to protect you.

Returning to the term liquidation, there’s nothing to liquidate if there’s negative equity. What is the trustee going to do? Take your car away? The bankruptcy trustee can’t sell it. For that to happen, the bankruptcy trustee must take $5,000 out of their pocket to sell it first. It doesn’t make any sense.

So, negative equity is a good thing when it comes to filing for bankruptcy. Also, note that if your car is too upside down or the payments are too high, you can surrender the vehicle. This might be more financially beneficial in the long run.

What Are Reaffirmation Agreements

Now, what if you are keeping your car? Well, chances are the bank is going to require a reaffirmation agreement. A reaffirmation agreement is simply a contract confirming you’re keeping your vehicle.

What changes with your car loan balance? Nothing. The interest and loan balance will remain the same. While there’s no rule stating the original loan terms can’t be renegotiated, chances are the bank will not make any changes.

The Pitfalls of Signing a Reaffirmation Agreement

There are pitfalls to consider when reaffirming agreements. For example, Chapter 7 bankruptcy can only be filed every eight years. So what happens if your financial situation changes? For example, illness, hospital stays, unemployment, three years after your bankruptcy?

Then, you must wait another five years to file Chapter 7 bankruptcy again. If your car gets repossessed, the lender will sue on the car loan balance, and throughout that time, the lender can enforce the judgment, whether by wage garnishment or liens.

• Creditors’ Scam with Reaffirmation Agreements

Remember, with a reaffirmation agreement, you are signing a contract with the lender, confirming that your car is excluded from bankruptcy. So if that happens, besides the lender collecting on the judgment until you can refile for bankruptcy, you would have to file for bankruptcy again.

So, that is the downside to reaffirmation agreements.  We can’t predict the future, so keep that issue in mind.

Your Car Loan and the Automatic Stay

Creditors tend to overreact when bankruptcy is filed. Remember that the automatic stay prevents most lawsuits from moving forward. So, if you’re being sued by a credit card company and file for bankruptcy, that lawsuit is paralyzed until the bankruptcy has been completed. The problem with the automatic stay is with secured debt like a car loan or mortgage.

The lender most likely won’t talk to you if you have a lawyer and will usually limit access to your account online, especially if you’re trying to make a payment.

Sometimes creditors will accept payments over the phone and will definitely cash any checks sent to them. Still, other payment collection forms are usually rejected because creditors think it violates the automatic stay and the Fair Debt Collection Practices Act. So, most likely, payments will have to be mailed in.

The problem is that life gets in the way. We have a million things going on simultaneously: the house, the kids, work. Before you realize it, the bank did not automatically withdraw, and now you are 30 days late on your payment.

So make sure that your car and mortgage payments remain up to date once you have filed for Chapter 7 bankruptcy.

So that wraps up today’s subject on issues with your car loan, bankruptcy, and reaffirmation agreements.

I’ll see you soon. Be safe, and have a good weekend.

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Please note that the information provided on this website is not considered legal advice and should only be used for informational purposes. Please always contact a local attorney for specific advice regarding your case.

The transcript was edited for clarity.