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How to Decide Whether to Reaffirm a Car Loan in Bankruptcy

Since 2005, people filing bankruptcy have had an important decision to make regarding their car loans: Do they reaffirm the debt through a reaffirmation agreement or return the car to the bank, wiping out the loan as part of their discharge. In making this decision, there are several things you should think about.

How much is the car worth in its current condition?

Is the loan balance more than that? Remember, you are agreeing to continue to be responsible for paying the loan after the bankruptcy is over. Every other debt, except this one, will be wiped out.

What if the car gets totaled in an accident, and the insurance company pays you less than the loan balance? Now you owe money and no longer have the car.

Does your bank insist that you reaffirm the debt, or pay off the loan, if you want to keep the car?

Not all banks do, and will let you keep the car as long as you keep up the payments, and maintain the insurance called in the past the "Pay and Ride" option. You need to discuss this with your attorney to see if this is an option.

Is there a co-signor who is not in bankruptcy?

If so, the bank may well not be able to repossess the car if you have not reaffirmed the debt (as long as payments and insurance are kept up) because the co-signor is not in default for failure to reaffirm.

Can you really afford it?

Really? If you are already deficit spending, the likelihood of your missing a payment or two in the future is very high. In that event, the car will be repossessed, and you may well be left with a loan balance that you can never get rid of.

This can also be a factor of how many more payments you have on the loan. Is it a few months or a few years? The longer the time, the greater the risk that something will go wrong.

Do you really need this car (or a car at all)?

People are of a mindset that they need a car because they have a job. They also get very emotionally attached to the one they have and do not consider other options. But is there a public transportation option? An office carpool? Can your spouse drive you to work?

Even if you do need a car of your own, that does not mean that you need the car you have. Is it a gas guzzler? Would a smaller, cheaper one do just as well? Could you use a tax refund to buy a cheap used car for cash?

Getting rid of a loan payment that you cannot really afford can make it easier for you to function in your post-bankruptcy life and more likely that you will enjoy that financial fresh start that you filed bankruptcy to get.

So What Do I Do?

If you live in South Jersey and are considering filing bankruptcy, please feel free to call me at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case.

If you are looking for more information about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.

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