Reaffirming Your Car Loan in Bankruptcy

Here in Phoenix, Arizona we are spread out quite a bit.  I live in the far east valley and drive about 40 miles into work each day. Needless to say Arizonans need a vehicle to get to work and shuttle their family around.

A big concern of many people filing for bankruptcy is whether or not they can keep their car and if so what happens to the loan on their car in the bankruptcy.  The good news is you can keep your car but you will be required to continue to keep making that monthly payment.  If you fall behind the bankruptcy court may give the bank permission to repossess the car.

If You Owe Money on Your Car You Must Submit a Reaffirmation Agreement

If you owe money on your car when you file for bankruptcy, the Bankruptcy Code requires that you timely enter into a reaffirmation agreement with the bank that you owe the money to.  Typically the reaffirmation agreement is nothing more than a document that has the same terms as the loan documents you signed when you first bought the car.

After you sign off on the agreement the bank will sign it and submit it to the bankruptcy court for approval.  And here is where it gets a little more complicated…

Arizona Bankruptcy Judges Generally Don’t Think Reaffirming a Car Loan is a Good Idea

The Bankruptcy Code requires that you sign off on the reaffirmation agreement and that it be submitted to the bankruptcy court for your judge’s approval.  But in Arizona the bankruptcy judge rarely approves reaffirmation agreements.

The reason they typically don’t approve the reaffirmation agreement is because of some of the negative consequences that can come from entering into such an agreement.  If the bankruptcy court signs off on your reaffirmation agreement, and later on down the road you are unable to make the monthly payments on your car, the bank can both repossess your car and sue you for any balance left over after they sell the car.

However if the bankruptcy court doesn’t approve your reaffirmation agreement then technically the bank could repossess your car – even if you are current on your monthly car payment!

This leaves you in a quite a predicament.

But the bankruptcy court has created a solution that will give you the best of both worlds.  The bankruptcy court will typically enter an Order that will tell the bank that you have done what is required of you under the Bankruptcy Code and further tell them that so long as you are making your monthly car payment it cannot repossess the car.

Further, if you for some reason you can’t make the car payments in the future and need to let the car go back to the bank, the bank is not permitted to try and collect any balance that may still be owing.

How Your Car Loan Will Be Reported on Your Credit Report

While this work-around is great for keeping your car and eliminating the risk of owing on it in the event that it is repossessed down the road, it does have one drawback – your credit report.

If the bankruptcy court does not approve your reaffirmation agreement the bank will not be required to report your on-time payments to the credit bureaus.  So while your loan balance will be going down you won’t get any credit for it on your credit report.

Not a perfect fix, but one that is probably in the best interest of most people going through the bankruptcy process.