For someone with overwhelming debt who is planning to file for bankruptcy, a vehicle loan may represent a small part of the monthly expenses. A vehicle is often essential for work or school, so many people want to keep that payment and forgo looking for a less reliable vehicle after bankruptcy.
Some lenders are willing to consider reaffirming a secured debt. It is not as simple as signing a new contract, though.
The reaffirmation agreement is a court document that the debtor and lender must both sign. It includes loan information such as the amount reaffirmed, which is the amount of the loan plus any other fees, interest and costs. Also included are the annual percentage rate, the terms of the new agreement and the payment amount. This probably will not be as low as the old payment.
The debtor has to demonstrate to the court that he or she can handle the loan after bankruptcy without undue hardship. The reaffirmation request includes post-bankruptcy income and expenses and other verification and documentation showing that the loan adds important value and will be a positive solution for the debtor and the lender.
Reaffirming debt can be dangerous because if the debtor finds that the payments are not possible after all, bankruptcy is not an option. If the debtor defaults on the loan, the lender can repossess the vehicle. If the amount of the loan is greater than the value of the vehicle, the lender can obtain a judgment and garnish the debtor’s wages.
Particularly for people filing bankruptcy because of considerable unsecured debt such as medical bills or credit cards, a reaffirmation agreement may be a good strategy.