Reaffirming a Debt in Bankruptcy Your Risks and Rewards
Richard Fonfrias, J.D.
Chicago's Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
If you have a car loan when you file a Chapter 7 Bankruptcy, you must tell the court whether you will keep the car or return it. If you want to keep your car, then you must pay for it. One way you can do this is by reaffirming your loan.
Lenders usually don't start foreclosure proceedings until you are several months behind in your payments. This allows you time to find a solution to the problem yourself, such as a short sale or a deed in lieu of foreclosure.
If, however, you have tried these measures without success, then it's time to speak with a bankruptcy lawyer. He will explain what bankruptcy can do to avoid or delay the foreclosure. If you are in the Chicago area, I invite you to call my Chicago law firm for further information on filing for bankruptcy in Illinois. Here are a number of ways bankruptcy could help you:
Security Interests in Car Loans
When you buy a car and borrow money to pay for it, you give the bank a "security interest" in your car. This means that if you stop making car payments, the bank can take your car to pay off your loan
Reaffirming Your Loan
Reaffirmation means that after your bankruptcy, you intend to keep the asset that you own, often a car. To keep the car, and avoid repossession, you sign a new agreement with the bank affirming that you will continue to make car payments just as if you had never filed bankruptcy. Before you reaffirm a debt, you must show the court that the car is necessary and that the payment will not pose an undue hardship on your family.
After you sign the reaffirmation contract, you can still change your mind about keeping the car. You have the right to rescind (cancel) the agreement within 60 days of when you signed it -- or before the bankruptcy court discharges your bankruptcy, whichever occurs later. If you cancel the agreement within the allowed time period, then you can return the car without penalty.
Legally, Here's What Happens
After the bankruptcy court discharges your debts, you are legally obligated under your new agreement unless you rescind it before the bankruptcy court discharge.
Your affirmation allows you to keep your car as long as your payments are current. But if you do not make payments as promised, the bank can take the car and sell it. If the auction's sale price does not cover the loan, then you are liable for the remaining balance, in addition to the costs of the auction.
How You Benefit from Reaffirmation
1. By reaffirming your car loan during bankruptcy, you commit to your interest rate and the amount of the payment. If you try to get a car loan after bankruptcy, that will be difficult unless you pay sky-high interest and get financing from a sub-prime lender.
2. You don't have to start with a new, long-term loan because the terms of your reaffirmed loan are still in place.
3. You continue to work with the same lender and maintain your relationship.
If you reaffirm the car loan and then cannot continue to make payments, you are legally responsible for the loan. If the lender takes the car and sells it at auction and if the sale price does not cover the loan, then you are liable for the remaining balance, in addition to the costs of the auction.
But if you do not reaffirm the loan and, instead, return the vehicle to the lender, then you are not responsible for any balance that remains after the sale at auction. The remaining balance is erased by your bankruptcy.