Reaffirming a Car Loan in Bankruptcy: Why I Almost Never Recommend It

What Is a Reaffirmation Agreement?

A reaffirmation agreement is a voluntary agreement, described in Section 524(c) of the Bankruptcy Code, in which you agree to remain personally liable for a debt even though your bankruptcy discharge would otherwise eliminate it. In plain terms: you sign a new promise to pay a debt that the bankruptcy was about to erase. Most reaffirmation agreements involve car loans.

To be enforceable, the agreement must be made before your discharge, it must be voluntary, and it generally has to be filed with the court. If you are represented by an attorney who certifies that the payments will not create an undue hardship, the agreement usually takes effect without a court hearing. If you are not represented by an attorney, or the judge wants to take a closer look, the court must approve the agreement at a hearing, and the judge is required to find that reaffirming the debt is in your best interest.

The Bankruptcy Code also builds in an escape hatch: you generally have the right to rescind, or cancel, a reaffirmation agreement until 60 days after it is filed with the court, or until your discharge is entered, whichever is later.

The Reaffirmation Hearing

When a reaffirmation agreement lands in front of a judge, the hearing tends to follow a pattern. The judge has seen thousands of car loans, and the math is rarely favorable to the debtor. Here are the situations that raise a judge's eyebrows most often.

Lenders Are Not All Alike

How any of this plays out depends on your circumstances, the lender, and the judge involved. It is not universal, but in my experience credit union car lenders tend to come down hardest on this issue. They often demand a reaffirmation agreement as a condition of letting you keep the car, and some will even threaten repossession if you decline. Other lenders simply do not care: they accept your payments, send your statements, and never ask you to sign anything. Your vehicle's fate is often more about which lender holds the loan than about the law itself.

My Position: Retain and Pay

I believe reaffirmations are almost never in a debtor's best interest. There is a better move, and most of the time it works out just fine: keep the car, keep making the payments, and skip the reaffirmation.

This is sometimes called "retain and pay." If you stay current, most lenders leave you alone. The advantage is enormous if circumstances change. Suppose the car is wrecked two years after your discharge. If you reaffirmed, you still owe every penny of that loan, and you are paying it off with no car. If you did not reaffirm, the debt was discharged, and the lender generally cannot pursue you for the balance no matter what happens to the vehicle.

There is case law backing this position. In In re Moustafi, 371 B.R. 434 (Bankr. D. Ariz. 2007), a debtor whose reaffirmation was not approved kept her vehicle and continued making payments, and the court ordered that the lender could not repossess the car as long as she stayed current. The court was influenced by the fact that the vehicle was necessary for the debtor to get to and from work. Moustafi is an Arizona decision, so it is not binding on a Washington court, but it illustrates the approach I take with my clients' vehicle loans, and it shows that a judge agreeing with this strategy is not merely theoretical.

Honest Caveats

I want to be straightforward about the tradeoffs. Without a reaffirmation agreement, some lenders report your payments to the credit bureaus differently, or stop reporting them altogether, which can slow the rebuilding of your credit history. A lender who threatened repossession may actually follow through if you fall behind, and staying current is entirely on you. And while Moustafi is encouraging, outcomes depend on the judge involved, and your judge's practice may differ. This is a case-by-case conversation, and it is exactly the kind of thing we will walk through together before your case is filed.

Common Questions