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Should you reaffirm your car loan as part of a bankruptcy filing?

Filing Chapter 7 bankruptcy is an important, life-changing decision. However, other choices must be made as part of your debt discharge, one important one being what debts to discharge and what loans to reaffirm.

One of the assets many debtors want to keep is their cars. You may have to balance forfeiting the money paid towards the loan by surrendering it versus the vehicle selling at auction that prevents your lender from suing you for the deficiency.

Keeping the vehicle requires reaffirming the loan. Essentially, you commit to a restructured contract. The lender cannot repossess the vehicle while payments are being made.

For most people, cars are a necessary conveyance to get to work and back, run errands, and drive kids to school or activities. Most lenders would prefer keeping the loan active instead of repossessing a vehicle. However, proactive steps to reaffirm the loan may be necessary, as some lenders will immediately pursue repossession once a bankruptcy is declared.

Taking chances with such a vital asset is not recommended.

Benefits of reaffirming a loan include the chance to rebuild credit, as payments will be reported to credit bureaus. Lenders may be even be open to tacking missed payments onto the end of restructured contracts or offer a reduction in interest rates or on the overall size of the loan.

With the benefits come drawbacks. Once a car loan is reaffirmed, protection provided by Chapter 7 is no longer an option. Falling behind after the discharge allows a lender to repossess the vehicle, sell the car at auction, and pursue the difference between the sale price and loan balance.

That will leave you without a car and with damaged credit and hundreds, if not thousands of dollars in debt, making it challenging to secure a down payment for a new car.

The decision to file for Chapter 7 bankruptcy requires insight from an attorney who can explore all options to get the fresh start you need.

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