If you file for Chapter 7 bankruptcy while in the process of paying off a car loan, you'll need to make a decision about whether or not you want to keep the vehicle. If you surrender the car, you'll, of course, forfeit the money you've paid toward the loan. However, the lender won't be able to sue you for a deficiency balance once the vehicle is sold at auction.
On the other hand, if you want to keep the vehicle, most lenders will require you to reaffirm the loan. Reaffirming a car loan involves committing to a restructured contract. And with reaffirmation, the lender won't be permitted to repossess the vehicle as long as you're making payments. But if you miss payments after your discharge, you will be in a bad position. At this point, the car can be repossessed and the lender can sue you for a deficiency balance.
The Benefits of Reaffirming a Car Loan during Chapter 7 Bankruptcy
If you need your car to get to and from work, reaffirming the loan may be your best option. Some lenders will immediately repossess a vehicle once bankruptcy is declared. Others may not, but reaffirming a car loan is the only way to get guaranteed protection against repo during bankruptcy.
Other benefits of reaffirming a car loan include:
- The chance to continue building your credit: Even if a lender doesn't repo your vehicle during bankruptcy, they may not continue to report your payments to the credit bureaus. With a reaffirmed loan, however, they will probably continue to report payment activity.
- An opportunity to get better loan terms: Most lenders would rather keep you in a loan instead of repossessing the vehicle. So, they may be willing to give you a better interest rate or reduce the size of the loan in order to make reaffirmation more attractive.
- The option to keep your current loan terms: Getting an auto loan after bankruptcy isn't impossible. But you may have to face a higher interest rate than the one you're currently paying.
If you're behind in your payments, some lenders may require you to make these up before allowing you to reaffirm your loan. Other lenders, though, will be willing to tack missed payments onto the end of a restructured contract.
Possible Consequences of Car Loan Reaffirmation
There is only one major drawback to reaffirming a car loan, but for a lot of consumers, it's a big one. Once you reaffirm, you no longer have bankruptcy protection when it comes to your loan. When you are discharged from Chapter 7, you have to make every car payment on time.
Otherwise, the lender has every right to repossess the vehicle. They can then sell the car at auction and make you pay the difference between the selling price and your loan balance. And for most people, this would not be a good situation to be in after coming out of bankruptcy:
- You would be without a car.
- Your credit would be damaged by the bankruptcy filing.
- You might owe hundreds or even thousands of dollars.
So, while it is possible to get a new auto loan after bankruptcy, it might be hard to come up with a down payment if you owe money on a deficiency balance. Therefore, the decision to reaffirm a car loan during Chapter 7 shouldn't be taken lightly.
In fact, car loan reaffirmation should only be considered by those who depend on their vehicles to get them to work or school. Also, once the commitment is made to reaffirm, consumers who take this option should budget carefully from month to month to ensure that payments aren't missed.
Finding an Auto Loan after Chapter 7 Bankruptcy
If you've recently been discharged from Chapter 7 bankruptcy and need a car, Auto Credit Express can help. We understand that your credit may not be in the best shape, but financing options are still available.
In fact, we can match you with a local dealership that has connections with special finance lenders. These lenders are able to work with unique credit situations. And the good news is that our service is free and comes with no obligations. So, go ahead and fill out our simple and secure auto loan request to get started today.