Keep Your Vehicle without Reaffirmation

Can you keep your vehicle without reaffirming its loan? Can you make the payments without reaffirming? What if you can’t afford the payments?

Last week we discussed keeping your vehicle in Chapter 7 by entering into a reaffirmation agreement with your vehicle lender. Through this agreement you exclude your vehicle loan from the discharge of debts. In return you get to keep your vehicle. You also get an early start on rebuilding your credit by making payments on and eventually paying off this loan.

We ended last week with two unanswered questions:

• Would you be able to keep your vehicle in a Chapter 7 case if you DIDN’T sign a reaffirmation agreement but just kept current on your payments and insurance?

• Are there any other options if you couldn’t afford the vehicle payments even after discharging your other debts?

We cover the first question today, the second one next time.

Risks to Avoid If You Can

Think long and hard before entering into a reaffirmation agreement. If you sign the agreement you’re passing up on this one-time opportunity to get out from under the debt. Be sure you understand the risk that you might not be able to make the loan payments at some point. Then you’d have to surrender the vehicle. At that point you would likely be left owing the lender a “deficiency balance.” This is the amount remaining on your debt after applying the lender’s proceeds from selling your vehicle after repossession. The “deficiency balance” you’d owe would likely be much more than you expect because of the costs the lender is allowed to add to the debt, and the relatively small amount it would likely get from auctioning off your vehicle.

A “Ride-Through” Option?

One possible way to avoid this risk of a deficiency balance debt is to make the payments without reaffirming the debt.

The idea is that your lender shouldn’t be able to repossess your vehicle if you’re complying with all your contractual obligations. This mostly includes being perfect on your monthly payments and keeping the vehicle insurance current.

And if you don’t sign a reaffirmation agreement you won’t be liable for any remaining debt on the loan. The vehicle loan debt would be discharged along with your other debts.

So you’re trying to keep the vehicle without the risk of owing a big balance if you ever have to surrender it.

“Ride-Through” Problems

There’s one huge problem with this attractive-sounding option. In most (if not all) of the country, a vehicle lender DOES have the right to repossess a vehicle once the Chapter 7 case is over if there’s no signed reaffirmation agreement. This is true even if the loan payments and the vehicle insurance are current.

So, most lenders insist on a reaffirmation agreement if you want to keep the vehicle. They have good reason to do so. They want you to pay off the entire loan. You’ll more likely do that if you have the risk of owing a deficiency balance hanging over you throughout the remaining life of the loan. The lender doesn’t want to leave you with the option of surrendering the vehicle whenever you want without financial penalty.

Your Remaining Options

You may nevertheless have some options.

• Some vehicle lenders may still allow you to just keep current without reaffirming, and keep the vehicle. These would more likely be smaller lenders. This may work especially with a vehicle that’s already worth less than what you owe. In this situation the lender may prefer getting your monthly payments instead of having to take a loss on the loan. This may be better on their books now and the lender has a good chance of getting more money in the long run. So ask your bankruptcy lawyer if your lender may be amenable to this.

• In some situations the bankruptcy court may not approve a reaffirmation agreement. This can happen if your lawyer will (strategically or otherwise) not sign off on the agreement. This then triggers the court’s review and necessary approval (which is not needed if your lawyer signs off). The court would likely not approve the agreement if your budget shows that you can’t afford the loan payments. If the court doesn’t approve the agreement, you may be able to keep the vehicle by just keeping current on the payments (by scrimping on the rest of your expenses). This option is tricky and should only be done with the advice and close assistance of your lawyer.

• Some lenders might let you adjust the contract terms in your reaffirmation agreement, such as by lowering the monthly payments. Since then you’ll more likely be able to make the payments, it’s less likely the vehicle will get repossessed. So reaffirming in this situation is less risky. Frankly, most vehicle lenders aren’t this flexible, but talk with your lawyer about whether yours might be.

• Chapter 13 “cram down” could force your lender to accept lower monthly payments, and even money overall. This is an important option if you must keep your car and can’t afford to do so without lower payments. This is the topic of next week’s blog post.