The dilemma of whether or not an individual should reaffirm an auto loan in a Chapter 7 bankruptcy case is one that I confront almost daily. Generally speaking, you cannot pick or choose which creditors are going to be “included” in your bankruptcy case. It is an all or nothing proposition. However, there are special rules that govern secured loans, or loans for which you have offered up some kind of collateral. The most common type of secured loan that I routinely encounter is an automobile loan that allows the lender to repossess the vehicle if you fail to make the payments as set forth in the loan documents signed at the time of purchase. One of the special rules that applies to secured loans allows the individual filing for bankruptcy to enter into an agreement with the lender to, in essence, exclude the loan from the bankruptcy process. Such an agreement is called a reaffirmation agreement.
Very careful consideration should be given when deciding whether or not to enter into a reaffirmation agreement because, no matter what the outcome of your bankruptcy case is, or what financial difficulties you may face after your bankruptcy case has concluded, you will be financially responsible for a reaffirmed debt after your case is over. Because this is such a serious question to be answered, bankruptcy court approval is required in order for a reaffirmation agreement to be effective.
Many purchase contracts for vehicle loans contain language that says that the mere act of filing for bankruptcy, regardless of what payments have actually been made, constitutes a “default” under the contract. This default would typically give a car lender the right to call for the immediate payment of the entire remaining balance on the loan. Needless to say, few people can afford to pay off the loan in such a situation, which in turn would lead to repossession of the vehicle.
How Does the Updated Bankruptcy Law Change the Analysis?
In the past in Nevada, many individuals filing for bankruptcy have opted to enter into reaffirmation agreement for vehicle loans simply to preclude a creditor from repossessing the vehicle and agree to allow them to remain in possession of the vehicle, as long as they continued to otherwise perform under the terms of the contract (i.e., make the monthly payments). However, there was a change in Nevada law on October 1, 2011. Under the new law, the mere act of filing for bankruptcy can no longer be considered a default under the terms of an automobile purchase contract. What this means is that if you have a car loan that was entered into after October 1, 2011, it is no longer necessary for you to enter into a reaffirmation agreement with your car lender in order to keep your vehicle from being repossessed because you filed for bankruptcy. Of course, in order to keep your vehicle long term, you’ll still be required to be in good standing with the creditor as it relates to the other terms of the vehicle contract. For most people, as long as you are current on your monthly payments and are maintaining current insurance coverage on the vehicle, you can keep your car from being repossessed by the creditor.
There are some minor benefits to doing a reaffirmation agreement anyway, however, those benefits are usually outweighed by the risk taken on by the person filing for bankruptcy should they choose to enter into a reaffirmation agreement. I recommend that if you are filing for bankruptcy and are planning on keeping your vehicle that is encumbered by a loan that you speak with an experienced bankruptcy attorney that can you guide you through this process.
