Saving Your Car in Chapter 7 Bankruptcy by Reaffirming the Debt

You may need to file for Chapter 7 bankruptcy, but are concerned you will lose your car. If the equity you have in the car is not exempt, you could lose it to the bankruptcy trustee. In some cases, even if the equity is not exempt, the bankruptcy trustee may abandon the property.

If the equity is exempt, or the bankruptcy court abandons it, you will still need to work out an arrangement with your lender in order to keep your car at the end of the bankruptcy process. In order to do this, you must reaffirm the debt. There are pros and cons to this process.

What does reaffirming mean?

When you reaffirm a secured debt like your car loan, you enter into a new written contract with the lender where you agree that you will still owe the debt at the conclusion of the bankruptcy. You may be able to negotiate new terms with the lender, like lowering the interest rate or increasing the length of the loan.

The new contract must be filed with the bankruptcy trustee who will evaluate your overall financial situation as well as the reaffirmation agreement and either allow or disallow it. If the court allows the new agreement, you must repay the debt according to the terms of the reaffirmation agreement.

The positive side is that you get to keep the property as long as you comply with the terms of the new agreement. The negative side is that if you fall behind in your payments under the new agreement, the property may be repossessed. You will still owe the debt and, if the lender sells the property, you will be responsible for paying the difference in what you owed and what the property sold for.