Once upon a time many bankruptcy debtors lived in a land of golden sunshine. In that land, at that time, Chapter 7 debtors were not obligated to reaffirm a secured loan in order to keep a vehicle.

The debtor’s personal liability was washed away by the Chapter 7 discharge, and only the lien against the vehicle remained. As long as the debtor kept up his or her monthly payments, the creditor could never take the vehicle.

In fact, if something unexpected like a blown engine happened down the road, the debtor could simply deliver the car back to the creditor and skip away without any further financial obligation.

Bankruptcy attorneys called this magical situation a “ride through,” though most courts agree that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) killed the ride through option. However, some states prohibit lenders from repossessing a vehicle based on a bankruptcy filing alone.

Effectively, these states (such as Pennsylvania and Massachusetts) allow their residents to keep the vehicle as long as the payments are current. So ride through lives on, though in a slightly different form.

Additionally, many non-reaffirming debtors discover that even in states that allow repossession after bankruptcy, most creditors will not repossess as long as the monthly payments are made. Ultimately, the creditor wants its money, not your vehicle!

The question for the Chapter 7 debtor, then, is simple: in situations where redemption or surrender are not practical options, and the reaffirmation terms are reasonable and affordable, should the debtor reaffirm his or her vehicle loan? Setting aside the tenuous legal situation a non-reaffirming, ride through debtor is placed, there are pros and cons to consider:

Pros of reaffirming a car loan

1) Credit after Bankruptcy. Rebuilding a credit score is simply a matter of showing responsible use of credit after the bankruptcy. By reaffirming a vehicle loan, the creditor continues to report the timely payments to the credit bureau. Credit building after bankruptcy is not available if the debtor surrenders the vehicle (or opts for ride through, where available).

2) Another Car Loan in the Future. Most captive vehicle lenders like Ford Motor Credit and Infiniti Financial Services are very forgiving when it comes to financing after a Chapter 7 bankruptcy, but auto lenders shy away from consumers who have surrendered or otherwise not reaffirmed a vehicle during bankruptcy.

2) Statements and Payment Options. Reaffirming a vehicle debt means that your relationship with the lender has not changed. You will still receive periodic statements and have access to web and phone payment conveniences. If the personal obligation is discharged in bankruptcy, the lender may not contact you about the debt, ever.

3) Terms may be Changed. A reaffirmation agreement may change the terms of the original contract. For instance, the interest rate may be lowered, the term may be lengthened (or shortened), or the principle balance may be reduced (especially if late fees and penalties are involved). Changing these contract terms can produce a more affordable loan for the debtor.

Cons of reaffirming a car loan

1) Continued personal obligation. A reaffirmation agreement continues the personal obligation of the debtor. Should the debtor default on the loan after bankruptcy, the vehicle may be repossessed and sold, and the debtor may be liable for a deficiency balance (which may quickly turn into a state court deficiency judgment).

2) Depreciating asset. Vehicles are depreciating assets. What looks good on paper at the time that the reaffirmation agreement is signed may quickly turn into a bad deal in the future. Consider: a two year old vehicle with 20,000 miles and a fair market value of $12,000 is reaffirmed for $12,000, 4.9% interest, over a remaining 36 months. That’s $359.11 per month. Now suppose the debtor gets a new job that requires extensive travel and high miles on the vehicle. Or the vehicle is in an accident and is repaired. The point is, a vehicle can depreciate quickly and what Is a fair deal one day can be an upside down mess a year later.

In the end, every case is different and each Chapter 7 debtor’s situation must be examined for the best results after bankruptcy. Some debtors may be in a better financial situation by not reaffirming a vehicle debt, while other debtors may benefit from the security of a reaffirmed loan but ultimately, all the pros and cons of reaffirmation should be discussed and considered with experienced bankruptcy counsel.

If you have questions about reaffirming a car loan during bankruptcy, you can contact us, we’re here to help.