“Can I keep my car?” It’s a common question when people meet with me for a consultation, and that’s not surprising. Given the limited public transportation options in the Indianapolis area, most people here rely upon their vehicles to get them where they need to go.
The good news is that most of my clients are able to retain their cars. If the vehicle has an outstanding loan, and the client chooses to file a Chapter 7 bankruptcy, then keeping the car often involves signing a “reaffirmation agreement.”
What’s a Reaffirmation Agreement?
A reaffirmation agreement is a contract between the debtor and the creditor. The agreement says the debt in question will not be discharged by the debtor’s bankruptcy filing. In essence, with a reaffirmation, you’re signing back up for a debt that would otherwise be wiped out.
Since the goal of most bankruptcies is to eliminate debt, you should think carefully before signing a reaffirmation agreement. In particular, be sure you can afford the payment. If you reaffirm a debt and don’t make the payments, the lender will be free to take collection action against you, such as repossession or filing a lawsuit.
For a reaffirmation agreement to be enforceable, it must comply with several requirements listed in the Bankruptcy Code. These include:
- Terms: The agreement must set forth the terms of the debt, such as the balance, interest rate, and payment schedule.
- Right to Rescind: The agreement must advise you that you have a limited right to rescind (cancel) the reaffirmation agreement if you change your mind. You can rescind the agreement at any time before receiving your bankruptcy discharge, or within 60 days after the agreement is filed with the court, whichever comes later.
- Statement of Income and Expenses: In most reaffirmation agreements, you’ll have to state how much you make and spend every month. If your expenses will exceed your income, you’ll also need to explain how you can afford to make the payments on the debt you’re reaffirming.
The requirements above serve three purposes. First, your decision to reaffirm should be informed. As with any major financial transaction, it’s important to understand what you’re getting into.
Second, your decision to reaffirm should be voluntary. A creditor isn’t allowed to coerce you into reaffirming a debt.
Third and finally, the law discourages reaffirmation agreements that would result in financial hardship for the borrower. If you reaffirm a payment that you can’t afford, you won’t receive the financial “fresh start” that bankruptcy is supposed to provide.