I Did Not Reaffirm My Car Loan. Now What?

Navigating personal bankruptcy presents many complex decisions, particularly concerning secured debts like car loans. When you choose not to reaffirm your car loan during bankruptcy, you are deciding against a voluntary agreement that would make the debt legally enforceable again after your bankruptcy discharge. This decision carries specific legal and practical implications for both you and the lender.

Understanding the Status of Your Car Loan

When a car loan is included in a bankruptcy filing and not reaffirmed, your personal liability for that debt is discharged. This means that under 11 U.S.C. § 524, you are no longer legally obligated to repay the loan, and the lender cannot pursue collection actions against you personally, such as phone calls, letters, or lawsuits to recover the debt. The discharge acts as a permanent injunction, preventing creditors from attempting to collect the discharged debt as a personal liability of the debtor.

However, the lender’s lien on the vehicle remains intact. A lien is a legal claim on property, giving the lender a security interest in the car itself. Even though your personal obligation to pay is discharged, the lien allows the lender to repossess the vehicle if payments are not made as agreed. This distinction is outlined in 11 U.S.C. § 506.

In some jurisdictions, a “ride-through” scenario might occur, where a lender does not immediately repossess the vehicle if payments continue. This is an informal practice, not a formal legal right, where the lender may allow you to keep the car as long as you continue to make voluntary payments. Despite continued payments, the underlying personal debt remains discharged, meaning the lender cannot pursue a deficiency judgment if they later repossess and sell the car for less than the outstanding balance.

Your Options Regarding the Vehicle

Even without reaffirming your car loan, you have several choices concerning the vehicle itself.

One option is to continue making voluntary payments. Making these payments allows you to retain possession and use of the car, even though you are no longer personally obligated to the debt. If you stop making these voluntary payments, the lender can still enforce their lien by repossessing the vehicle, but they cannot pursue you for any remaining deficiency balance after the sale.

Another choice is voluntary surrender. This involves returning the vehicle to the lender, which can be a practical solution if the car is no longer needed or if the payments are unsustainable. Voluntarily surrendering the vehicle can help avoid the potential costs and inconvenience of an involuntary repossession. Since your personal liability was discharged, you will not owe any deficiency balance.

A third option is redemption, as provided under 11 U.S.C. § 722. This allows you to pay the lender the current market value of the vehicle in a single lump sum, thereby obtaining clear title to the car. This option is particularly beneficial if the outstanding loan balance is significantly higher than the car’s actual value, enabling you to acquire the vehicle for less than what was originally owed.

What to Expect After Non-Reaffirmation

After your bankruptcy discharge and the decision not to reaffirm your car loan, the lender’s actions are limited but still significant. If you cease making payments, the lender retains the right to repossess the vehicle based on their lien, even though they cannot personally collect the discharged debt. The repossession process involves the lender, or a contracted repossession agency, taking possession of the vehicle. While many states do not require prior notice before repossession, lenders must provide specific notices after the vehicle is taken, such as a notice of your right to redeem the vehicle or a notice of intent to sell the car.

Following repossession, the lender will sell the vehicle, often at an auction. The proceeds from this sale are applied to the outstanding loan balance and any costs associated with the repossession and sale, such as towing and storage fees. If the sale price does not cover the full loan balance, the lender cannot pursue you for the “deficiency”—the difference between the sale price and the remaining debt. This protection from deficiency judgments is a direct benefit of the debt being discharged in bankruptcy.

Regarding your credit report, the discharged car loan will appear with a status indicating it was “discharged in bankruptcy” or “included in bankruptcy,” and the balance should be reported as $0.00. If a repossession occurs after non-reaffirmation, it will also be reported on your credit file. This repossession event, like other derogatory marks, will remain on your credit report for approximately seven years from the date of the original delinquency that led to the repossession.