Should I Reaffirm Car Loan After Bankruptcy?

Dear Bankruptcy Adviser, I recently filed for Chapter 7 bankruptcy. I would like to keep my vehicle, and I owe a balance of $5,300. The vehicle is worth $12,400. Do I have any leverage to negotiate with the finance company to lower my payments if I decide to reaffirm the debt? -- Peggy

Dear Peggy, You are talking about a reaffirmation of the car loan with the lender. A reaffirmation agreement is a legally enforceable contract, filed with the bankruptcy court, which states your promise to repay all or a portion of a debt that may otherwise have been subject to discharge in your bankruptcy case. Executing this agreement gives the lender the right to sue you after the bankruptcy case closes in the event you do not pay back on the loan.

Be very careful. Most people who file bankruptcy have an "underwater" vehicle loan. Meaning, the owner owes more on the vehicle than it is worth. I would be very careful when you have equity in a vehicle. You must determine whether the reaffirmation agreement is mandatory or not. The lender may require you to sign this agreement prior to the completion of your bankruptcy case or repossess your car the day after your bankruptcy case closes. Other lenders allow you to keep and continue paying on the loan.

In your case, you don't want the car taken back because you have equity. Somewhat twisted, but even more obvious to me, is that the lender will want to repossess and resell the car since your balance is so low. It could resell the car and easily pay off the balance. Make sure to stay in communication with the lender once your case is filed to determine whether you must sign the reaffirmation agreement.

You are hoping to use the offer to reaffirm the loan as leverage to reduce the loan payment. I don't believe this will work when you actually have equity in the vehicle. The lender does not want to do any more work. Handling a reaffirmation agreement and the loan modification is too much for them.

You also need to know whether the lender will work with you before calling. There are four types of lenders: credit unions, banks, finance companies and hard-money lenders. From my experience, not all are willing to work with you.

Credit unions are the most likely lender to work with you. They are more "member focused" and do sometimes care about the relationship. Since credit unions are smaller financial organizations, you are more likely to work with the same individual from start to finish. That person can tell you immediately whether you can modify the loan.

Banks will sometimes, but infrequently, work on a car loan modification. Getting in touch with the same person will be your first challenge. You will likely have to work with someone in the bankruptcy department, the lost mitigation/collection department and the car loan department. Each individual will be located in a different call center, state or even country. And each person will tell you that you need to talk to someone else and will not be able to communicate with one another. You likely will have to work with a different person each time you call.

Most banks have streamlined the bankruptcy reaffirmation process, but that is just to execute the reaffirmation agreement itself and make sure it is filed with the court. Generally, the employees in that department do not have the authority to work out a loan modification.

Finance companies will almost never modify the loan. I would have said that you can never modify with a finance company, but I am sure there has to be one exception. I just would not count on it. You might not even be able to reaffirm the loan agreement. You just have to make the payments to keep the vehicle.

A hard-money lender is similar to finance companies, but usually works with people who had poor credit even before filing bankruptcy. Finance companies have higher credit standards. Most hard-money lenders do not require you to reaffirm the loan, but may work on a modification on a case-by-case basis.

Above all else, do not play a game of "chicken" with the lender. You have more to lose -- the equity in your car.

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