Should I reaffirm my auto loan after bankruptcy?

Hundreds of thousands of Americans file bankruptcy each year.

Many of the people that file for bankruptcy owe money on a car or truck already, and they have to decide whether or not they will reaffirm their auto loan.

If you don’t know, a reaffirmation agreement is between a debtor and the lender and it allows the debtor to exclude the loan from a Chapter 7 Bankruptcy.  Basically, it means that the person who filed is still responsible for the loan, and will have consequences if that loan is not paid (just like if the bankruptcy never happened).

For most people, reaffirming a loan after bankruptcy is a bad idea.

First, the majority of people with car loans owe too much money on their vehicle. When you owe more money on your vehicle than it is worth, it is called Negative Equity. Typically, people do not put enough money down when they buy cars and they extend the loan to get a low payment. Good or bad credit, you can still have negative equity if you do not put a lot of money down and you choose a long term loan. If you just filed bankruptcy, why would you want to take responsibility for a vehicle you owe too much money on?

Second, it is common for a reaffirmed loan to still show included in bankruptcy on your credit bureau. If there is a chance that you will not get a positive credit rating for an account, why keep it?

There are some situations where it can make sense to reaffirm an auto loan after bankruptcy.

Do you have a significant amount of equity? Do not give away that equity. Sell the car or trade in the vehicle so that you get that money back. But beware, not everyone who THINKS they have equity really does. Your vehicle is only worth what someone will pay for it. Talk to a reputable dealer in your area and ask them to do an appraisal to buy your vehicle. That way you can find out what it is really worth, should you want to sell it quickly.

Is there a co-signer on the loan that did not file bankruptcy? If you cannot give the vehicle back in the bankruptcy because you do not want to hurt the co-signer’s credit, you still may be able to avoid a reaffirmation agreement. The best thing you could do is surrender your interest in the vehicle in the bankruptcy, but keep the loan payments current so that the co-signer does not have a penalty on their credit. Eventually you will pay the loan down enough that you can trade the car in and get it out of the other person’s name. If the lender requires you to reaffirm the loan, then sometimes that might be the right decision, depending on your relationship with the co-signer.

Another reason to consider reaffirming a loan after bankruptcy would be if you do not qualify for financing after your bankruptcy.  If your income is too low to get approved for a car, or if you need a full ton truck for your job, but you do not qualify for a large enough loan to buy that type of vehicle it might make sense to reaffirm.

Outside of those unique situations, do yourself a favor and do not reaffirm your loans. If you want to keep a vehicle, redeem the loan. But do not reaffirm.

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