Should I reaffirm my car loan after I file for bankruptcy in Los Angeles, CA?

If you file for Chapter 7 Bankruptcy and you have a vehicle that you are financing, you will face a decision on whether to reaffirm the car loan.

What happens when you reaffirm your loan? Well, when you file for bankruptcy, the bankruptcy in essence “tears-up” the contract you have for the car loan. As such, if you do nothing, and later decide for whatever reason that you no longer want to honor the contract by paying as agreed, you will not have any additional PERSONAL LIABILITY. Does it mean that you can stop paying and still get to keep the car? NO! The company can repossess the vehicle, after taking the proper steps. What it does mean is that after they repossess the vehicle, if they sell it for less than what you owe (which always happens, go figure), they cannot collect the deficiency amount from you. Without the bankruptcy, if you stopped paying and they repossessed the vehicle, you would be liable for the deficiency.

By signing a Reaffirmation Agreement after you file for Chapter 7 bankruptcy you are losing your free pass to not have PERSONAL LIABILITY under the loan. So why would you sign, if it’s an option. Well, because after the changes in bankruptcy law in 2005 and subsequent case law that came out, it appears that just retaining the vehicle and continuing to pay is no longer an option. Does it mean that if you don’t sign and continue paying, that they will still repossess the car for sure. The answer is it depends. It depends on the lender. It depends on whether you are on time with your payments. It depends on whether there is equity in your vehicle. Ultimately though, I cannot say with 100% certainty that you will get to retain the vehicle by paying regularly, when you don’t sign the Reaffirmation Agreement. Some attorneys disagree and discourage their clients from signing, but I actually had a client who was a little late on her car payments, she DID sign the reaffirmation agreement, and she got her car repossessed. She called me frantically and the first thing they wanted proof of to return the vehicle was proof that she signed her Reaffirmation agreement. Could she have gotten her vehicle back without it? Maybe. Are there State laws there to protect her rights? Yes. But from a practical standpoint, here is what I look at and why more often than not I help my clients complete their Reaffirmation Agreements.

We live in California, more specifically, in LA. Call me snobby, but it is very hard to get around without a car. Most of my clients could not get to their job without a car. They couldn’t pick up their kids from school or look for new jobs. Life without a car would be very difficult for most. Having the car repossessed even for a little while would bring in a lot of stress and additional costs into their lives.

When we talk about Reaffirmation Agreements, we look at several things to determine if they make sense:

1. How much is a car worth and how much they would have left to pay under the Reaffirmation Agreement. If the car is worth SIGNIFICANTLY less and has problems than what they will have to repay under the Agreement, it obviously makes no sense to sign the Agreement.
2. Can Debtor afford the payment? Have they been late a lot, will it create a financial strain in the future? If that’s the case, there is no point in signing an agreement that will cause additional financial strain after the bankruptcy. Better to just take a chance.
3. Can it make sense to get a cheaper car before bankruptcy through financing, and return the one the debtor is currently driving. If that happens, obviously reaffirming the loan on the car to be returned will not make sense. The decision to do that would then have to be made prior to the filing of the bankruptcy, because obtaining financing for a new car that debtor intends to keep will be easier prior to bankruptcy, than during or quickly after. It is not bad faith to obtain new financing right before the bankruptcy as long as you intend to pay the loan as agreed.
4. What are the terms of the Reaffirmation? Some lenders are willing to provide better terms than the original loan, if the client Reaffirms. They also may provide additional perks, like forgiving missed payments, or working with the client in the future if they run into trouble. Something to think about as well.

Making the right decision regarding Reaffirming your car loan is another reason to hire a qualified bankruptcy attorney to help you with your bankruptcy filing. If you have any questions feel free to call me at (310)481-5098 or email at goreliklaw@gmail.com

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