Bankruptcy is a word that makes people shiver. It’s a nightmare, akin to admitting failure. However, for many people, it also offers a clean slate, a way out from under crushing debt and a chance to start over and do things right. Still, bankruptcy carries with it a number of scary problems.
Loss of Assets
Not only does bankruptcy take up to ten years for it to come off of your credit reports, in some cases you have to sell all your assets to pay portions of your bad debts. Your car, unfortunately, is considered an asset and your car loan must be included in the bankruptcy. So what if you need your car to get to work? What if you still intend to continue your payments?
If you want to keep your car this is possible, but you will need to sign what is known as a Reaffirmation Agreement. This agreement is a contract you establish with the court, which states that you intend to keep and maintain a debt that the bankruptcy otherwise would’ve cleared.
If you want to keep your car in a bankruptcy, you will likely need to sign one of these agreements. In fact, without it, some lenders will outright repossess your vehicle. Others will still allow you to make payments, but will cease reporting to the credit bureaus unless you fail to make payments, meaning that while usually “good debt,” your car loan will no longer help you improve your credit score. This is often the case, however, even with a reaffirmation agreement, so you need to carefully weigh your options.
Should You Sign?
There are several factors that come into play when determining whether you should sign a reaffirmation agreement. The first, obviously, is to assess whether you can actually make the payments. If you’re filing bankruptcy it’s probably because of financial distress.
The second is, do you need your car or is it just sentimental? If you’ve got a good public transportation system, you might be able to go awhile without a car while you rebuild your credit.
If you can still make payments and you determine you actually need the car, assess the amount you still owe and how long you’ve got left to pay. If you’ve only got a couple years left on your payments (2 or less), and have a low balance on your loan, it might be worthwhile to sign the reaffirmation agreement.
Keeping your car after filing for bankruptcy is a tricky situation, and a decision you must make carefully. Do not view it as an opportunity to rebuild credit, be sure that you can make the payments on your car loan, and that you really need the vehicle. Otherwise, it may be better to let it go.