How Chapter 7 Actually Works When Reaffirming a Vehicle Loan

“Straight Bankruptcy” and Secured Debts

A secured debt is one in which in which you have in effect made two agreements with your creditor: 1) you agreed to pay the amount you owe, and 2) you agreed to surrender the collateral if you don’t pay. So with a secured debt, if you don’t keep up on your payments, the creditor has the right to repossess the collateral.

A Chapter 7 discharge (legal write-off) of a debt erases the debt—the first of those two agreements—but does not affect your obligation to surrender the collateral if you don’t pay the debt. So if there is some collateral you want to keep—such as your vehicle—you need to keep paying for it.

Definitely Secured by Your Vehicle?

Most of the time there is no doubt that your car or truck is legally tied to your debt as collateral, meaning that the creditor truly has a right to repossess your vehicle if you do not pay. But sometimes, such as when an already-owned vehicle is provided as security for a personal loan or when the vehicle is supposed to be collateral on the purchase loan but the paperwork is not processed appropriately, a vehicle which you understood was collateral on a loan in fact is not. Since this changes everything, this is something your attorney should determine early in the process.

Are You Current or Almost Current on Your Vehicle Loan?

To keep your vehicle under Chapter 7, most of the time you must either be current on your vehicle loan or be able to get current within a month or two of filing the case. That’s especially true with the major nationwide vehicle lenders. In some unusual circumstances you may be given more time than that to catch up, or the unpaid payments may even be put at the end of the loan contract. Ask your attorney about what your particular lender will likely require.

If you can’t bring your loan current as fast as your lender requires, your better option may be filing a Chapter 13 case, which usually gives much longer to catch up on your vehicle loan, and may give you other significant advantages with that loan and with other creditors.

Reaffirming Your Vehicle Loan

Assuming you are current or can get current quickly, in most situations under Chapter 7 you must sign a “reaffirmation agreement” to keep your vehicle. Through that document you “reaffirm” your debt in spite of your bankruptcy. You are saying that even though you filed a Chapter 7 case to discharge your debts, you want to exclude your vehicle loan from the discharge of your other debts. You are agreeing to stay liable on this one particular debt in order to keep your car. It also can help you get a jump on rebuilding your credit. So reaffirming can often be a very sensible move.

Risk of a Future “Deficiency Balance” Debt

The potential disadvantage of reaffirming your vehicle loan is that if you were ever unable to keep up the payments you could be liable for the “deficiency balance.” That’s the amount still owing on the debt after the lender would repossess and sell your vehicle, and apply the sale proceeds to the loan balance.

The odds of this problem ever arising depends, first, on the likelihood that you would not be able to maintain the payments as reaffirmed, and second, on how much you owe on the vehicle compared to its value. You should think very carefully about reaffirming a vehicle loan if you do not anticipate having a stable source of income throughout the remaining length of the loan, and/or if the vehicle is not worth at least as much as you owe on it.

In some limited situations you might be permitted to keep your vehicle by just keeping current on your payments without reaffirming the debt. This way if you miss or are late on a payment the creditor could immediately repossess your vehicle. But you’d have the advantage of not risking a future “deficiency balance” because without a reaffirmation the creditor’s rights are limited to repossession. This no-reaffirmation option is not likely available with most creditors, so ask your attorney.

If you live in the Dallas-Fort Worth Metroplex, call me to determine if Chapter 7 is right for you regarding your vehicle loan and all your debts. I am Carrie Weir, and I’m a Texas bankruptcy attorney serving the Metroplex, especially the area around Rockwall, Heath, Greenville, Lavon, Wylie, Mesquite, and Rowlett. Please contact me for a free and confidential consultation, so that you can make an informed choice about your vehicle and the rest of your finances. Call 972-772-3083 or use the contact form here. I look forward to helping you.

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