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Should You Reaffirm Your Car Loan During Bankruptcy?

Should You Reaffirm Your Car Loan During Bankruptcy

Even if you currently have a loan on your car, you can still keep it during bankruptcy. Bankruptcy proceedings generally let you keep up to a certain value in vehicles. If you have very low equity in your vehicles, you're not likely to exceed this amount. To keep your loan and its terms, you often need to reaffirm it. Reaffirming the loan means re-signing a contract with your lender and promising to pay it.

Reaffirming your loan isn't always a good idea, however. Before you decide to reaffirm your car loan, ask yourself the following questions.

How Much Is Your Car Payment?
First you need to decide whether you even want to keep your car. If you have a low car payment, it makes sense to keep your car loan. And assuming that you don't have another car available, it's reasonable to keep your source of transportation.
On the other hand, if you have a moderate car payment, keeping the loan could only get you in financial trouble again. Take a long, hard look at your finances to determine whether you can truly afford your car loan.

Do You Owe More Than Your Car Is Worth?
If you're underwater on the car, it may not be worth your trouble. At the beginning of your loan, you almost always owe more than the vehicle is worth. A new vehicle could have the purchase price of $20,000 but immediately depreciate to $15,000 once you drive it off the lot.

That leaves you with a $20,000 loan for a vehicle that's only worth $15,000. If you don't want to continue carrying debt, it may be better to simply call the loan.

Could You Buy a Cheaper Car?
Let's say you have a $10,000 loan on a $15,000 car. If you sell your car for $15,000, that's $5,000 that you could put towards a more reasonable vehicle. On the other hand, if you only have $2,000 in equity, any car that you purchase is more likely to be high risk. You could end up with a car that needs a lot of repairs, or a car that breaks down frequently.
Let's say you have a $10,000 loan on a $15,000 car. If you sell your car for $15,000, that's $5,000 that you could put towards a more reasonable vehicle. On the other hand, if you only have $2,000 in equity, any car that you purchase is more likely to be high risk. You could end up with a car that needs a lot of repairs, or a car that breaks down frequently.
There is value in having a stable, reliable car, especially if you have only a single car and multiple people in your household. Though your car may be an additional expense, it may also be the only way you can get to work and continue earning.

How Are Your Rates?
One of the benefits to being able to reaffirm a loan is that you can lock in the interest rates and term that you had before. You aren't renegotiating the loan, you're just reaffirming it. If your rates are already extremely favorable, it may be helpful to keep the loan. The loan will not only let you keep your car but will also be a head start towards building your credit score back up.

Will Your Lender Let You?
There's one final thing to consider: not every lender will let someone reaffirm their loan after bankruptcy. If you've previously been significantly late on your loan payments and the lender doubts that you'll be able to pay the loan, it may be too risky for them to let you reaffirm your loan. A lender may simply recall your loan during the bankruptcy, which means you'll either have to pay up or get rid of your car.

Reaffirming your car loan during bankruptcy isn't always a bad idea. Keep in mind that you can continue to make payments against your vehicle and keep it without reaffirming the loan, though some lenders may take action.

As long as you keep the loan current, they can't repossess the vehicle. However, all the comforts of maintaining an official loan (such as acquiring bank statements and being able to pay online) will usually be gone.

Bankruptcy is filled with some difficult decisions. William S. Orange III, Attorney at Law, can help you make these decisions and more. Contact us today to begin the bankruptcy process.

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