Should I Reaffirm My Car Loan Debt in a Chapter 7?

We all need transportation to live and work normally. If you're thinking about chapter 7 or currently in a chapter 7, you will need to decide what to do with your car.

While you can almost always keep it in a typical chapter 7 case, there are cases where letting it go and getting the debt against it discharged may be the smarter move.

Why Would I WANT to Get Rid of My Car?

Because you can't afford it. 

It happens all the time. You walk onto a car dealer lot with the idea of getting a used car, or an inexpensive new model, and walk off the lot with a car costing twice as much as you intended to pay. You were "sold" by an aggressive car salesman, and now you're driving a shiny new SUV loaded with navigation, leather heated seats, DVD player and who knows what else.

If this is you, and you're facing a bankruptcy case, you really need to rethink that decision now while you have the opportunity.

What Are My Choices?

Outside of a bankruptcy, once you buy a car you're on the hook for that debt until it's repaid. However, while in a chapter 7, you can elect to return the collateral (the car) to the creditor in exchange for a complete discharge of the outstanding debt.

Imagine you owe $30,000 on a car that's worth $20,000. It's typically the case that a loan against a car will be paid off much slower than the rate of depreciation on the car itself, so it's very common to owe more than the car is worth. Right now, in a chapter 7 bankruptcy, you can just return the car, and get rid of all that debt for good. Once your bankruptcy is complete, you can go out and buy a more modest vehicle to get you from point A to point B until your financial situation improves and you can justify buying a new car.

Alternatively, you can reaffirm that debt in your bankruptcy case, which basically means you keep the car, and remain liable for that $30,000. Essentially, that debt and collateral stay "out of the bankruptcy".

When Must I Decide?

You have thirty days from the date of the creditors hearing to notify the bankruptcy trustee and the court that you are reaffirming the car note debt. If you do not reaffirm the debt, the automatic stay provision protecting you from creditor collections is avoided, and the creditor has the right to repossess the car. If you elect to keep the car, then life will go on as before, so long as you stay up to date on the payments.