Pros and Cons of Reaffirming Your California Car Loan - Borowitz & Clark

Pros and Cons of Reaffirming Your California Car Loan

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Table of Contents
  1. How to Keep Your Car in Bankruptcy if You’re Still Paying for It
  2. Get the Information You Need to Rebuild after Bankruptcy

Can I keep my car if I file for Chapter 7 bankruptcy?” is one of the most common questions we hear. The answer is usually yes, since up to $3,325 or $5,850 in equity in your car is exempt, depending on which exemptions you choose. And, you may be able to supplement that with the wildcard exemption. 

Sometimes, the better question would be “Should I keep my car when I file for Chapter 7 bankruptcy?” Often, the answer is no–at least, for those carrying automobile loans. 

How to Keep Your Car in Bankruptcy if You’re Still Paying for It

Reaffirmation in Chapter 7 Bankruptcy

A reaffirmation agreement is a new contract with the lender that says you’ll be responsible for the debt on your car and the lien will stay in place, even though your other debts are being discharged in bankruptcy. Most lenders will require a reaffirmation agreement if you want to keep your car. 

However, the decision as to whether to reaffirm your car loan isn’t entirely yours. The court has to approve your reaffirmation agreement. The process for court approval of a reaffirmation agreement differs depending on whether you are represented by an attorney, and whether the attorney represented you in negotiating the reaffirmation agreement. If you have a bankruptcy lawyer and the lawyer represented you when the agreement was negotiated, your attorney must file a certification. 

The certification must state either that there is no presumption of undue hardship with regard to the payments you have negotiated, or that there is a presumption of undue hardship but the attorney has examined your finances and believes that you are able to make the payments. If you don’t have an attorney or your attorney won’t sign the certification, you will usually have to appear at a hearing and persuade the judge that you are able to continue making payments. 

The upside to reaffirming is obvious to most people: You keep your car. But, that’s not always the best option. Often, the fear of being without transportation prevents people from thinking through the drawbacks to reaffirmation and the possible alternatives.

Pitfalls of Reaffirmation

The first thing to consider when thinking about reaffirmation is whether your car payments fit your budget. While your attorney and/or the court will likely prevent you from agreeing to payments you truly can’t afford, there’s a difference between can and should. It’s possible that surrendering your vehicle and buying an older car with cash or financing a less expensive vehicle after bankruptcy would put you in a better position to rebuild your finances and your credit after bankruptcy.

Second, consider whether the car is worth what you’ll be paying for it. Since cars depreciate quickly, many car loans are “under water.” That means the outstanding balance on the loan is more than the car is worth. Last year, Edmunds reported that the percentage of cars offered for trade-in with negative equity was at an all-time high. So, reaffirming could be the equivalent of buying a $5,000 car for $8,000. 

You’ll also want to consider the risks of reaffirming your car loan. If you fall behind again after bankruptcy, the lender can still repossess your car. In other words, if you are too ambitious in reaffirming, you could recommit to the debt and then lose your car anyway. Worse, the lender will typically be able to pursue you for any deficiency balance. That means if they auction off your car for less than it’s worth plus the costs of the sale, you’ll still owe them money even though they took your car back. And, since you’ve recently filed for bankruptcy, you won’t be able to file again and discharge the deficiency balance. 

Alternatives to Reaffirmation

Depending on how much you owe, how much your car is worth, and the funds you have access to, you may be able to redeem your car. Redemption is like buying your car out of bankruptcy. Of course, many people filing for bankruptcy can’t afford to do this. But if you can, you may save a significant amount of money. The price for redeeming your vehicle in bankruptcy isn’t the balance on your loan, but the present value of the car. 

You may also choose to surrender your car and replace it. That may mean purchasing a less expensive vehicle with cash, or looking for a more favorable financing arrangement.

Get the Information You Need to Rebuild after Bankruptcy

Your fresh start in bankruptcy begins with the decisions you make when you file and in the course of your bankruptcy case. Making good choices for your financial future requires accurate information. The attorneys at Borowitz & Clark have devoted decades to helping people in and around Los Angeles get out of debt. To ensure that you have the information you need to make the most of the bankruptcy process and build the strongest possible foundation moving forward, we offer free consultations. You can schedule yours right now by calling 877-439-9717 or filling out the contact form on this page.

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