If you are considering filing Chapter 7 bankruptcy in Michigan, one of the most important decisions you may face is whether to sign a reaffirmation agreement on your car loan.

As a bankruptcy attorney who has practiced exclusively in bankruptcy law for 35 years, I have handled thousands of cases involving financed vehicles. I evaluate reaffirmation agreements on a case-by-case basis, looking at the client’s financial circumstances, the terms of the loan, the value of the vehicle, and the likelihood that the client will be able to afford the payments going forward.

My general recommendation is to avoid signing a reaffirmation agreement unless there is a compelling reason to do so.

Why? Because one of the primary purposes of bankruptcy is to give you a fresh financial start. Signing a reaffirmation agreement can undermine that fresh start by making you personally liable for a debt that would otherwise be discharged in bankruptcy.

Let’s look at what reaffirmation means, why I generally discourage it, and the circumstances in which signing one might make sense.

Myth: You Must Reaffirm Your Car Loan to Keep Your Vehicle

Reality: In many cases, you can keep your car without signing a reaffirmation agreement.

Here in the Motor City, I completely understand that having a reliable vehicle is essential. Unlike many major metropolitan areas, Metro Detroit does not have comprehensive public transportation that allows most people to get to work, take their children to school, and handle everyday responsibilities without a car.

For that reason, keeping a vehicle is a priority for many of my Chapter 7 bankruptcy clients.

Bankruptcy attorneys commonly use the term ride-through to describe a situation in which a debtor keeps a vehicle, continues making the required payments, and does not reaffirm the underlying debt. The important distinction is that a ride-through is not an unconditional legal right to keep a vehicle merely by making payments.

Under the Bankruptcy Code, particularly Sections 521(a)(2), 521(a)(6), and 362(h), a Chapter 7 debtor must comply with applicable requirements concerning secured personal property. Depending on the circumstances, those provisions can limit the ability to retain a vehicle without reaffirming the debt or redeeming the vehicle. The applicable law and the lender’s position must be considered before deciding how to proceed.

In practice, some automobile lenders will continue accepting payments after bankruptcy and allow a debtor to retain the vehicle without signing a reaffirmation agreement. Others may insist on reaffirmation or take steps to recover the vehicle if the statutory requirements have not been satisfied.

Here is the distinction I want my clients to understand: continuing to make payments may allow you to keep driving your car, but it does not necessarily mean that you have an enforceable right to retain the vehicle indefinitely without reaffirmation. Equally important, if your personal liability for the loan is discharged, the lender’s lien generally survives the bankruptcy.

That means the lender may still have the right to repossess the vehicle if the loan is in default or another legally sufficient basis for repossession exists, even though the lender generally cannot collect a discharged deficiency from you personally.

This is why I evaluate each automobile loan individually. I look at the lender’s policies, the payment history, the terms of the security agreement, and the applicable bankruptcy requirements before advising a client whether to reaffirm.

When a lender will permit you to retain your vehicle without reaffirming, that arrangement may offer a significant advantage: you can preserve your transportation without voluntarily taking on personal liability for a debt that would otherwise be discharged.

My general preference is to avoid reaffirmation when a legally viable alternative is available. Before signing an agreement, however, you should understand both your right to retain the vehicle and the consequences of remaining personally liable for the loan.

What Is a Reaffirmation Agreement?

A reaffirmation agreement is a legally binding agreement that allows you to exclude a particular debt from the discharge you would otherwise receive in bankruptcy.

In a typical Chapter 7 case, your personal liability for a dischargeable automobile loan is eliminated when you receive your bankruptcy discharge. The lender generally retains its lien on the vehicle, meaning it can still repossess the car if you default on the secured loan or otherwise have a lawful basis to enforce its lien.

When you sign a reaffirmation agreement, however, you agree to remain personally responsible for that debt despite filing bankruptcy.

In practical terms, you are giving up an important protection that bankruptcy would otherwise provide.

If you later experience financial difficulties, fall behind on payments, and have your car repossessed, the lender may sell the vehicle at auction and seek to collect the remaining balance from you personally.

Without a reaffirmation agreement, an otherwise dischargeable deficiency generally remains covered by your bankruptcy discharge. With a reaffirmation agreement, you may still be responsible for a substantial amount of money even after you lose the vehicle.

That is the risk I want my clients to understand before they sign anything.

Why I Generally Advise Against Reaffirming a Car Loan

1. You May Be Giving Up Your Fresh Start

The whole point of filing Chapter 7 bankruptcy is to eliminate qualifying debts and give you an opportunity to rebuild your financial life.

Reaffirming a car loan means voluntarily retaining personal liability for a debt that would otherwise generally be discharged.

Consider what can happen after bankruptcy.

You might lose your job. Your hours might be reduced. You might experience an unexpected medical expense. Your vehicle might develop a major mechanical problem that makes it impractical to continue driving. You might simply discover that your monthly expenses are greater than you anticipated.

If you cannot afford the car and the lender repossesses it, you could find yourself facing a deficiency balance that you thought bankruptcy had eliminated.

That is precisely the kind of financial problem I want my clients to avoid.

2. I Have Personally Seen Clients Lose Their Cars and Still Owe Thousands of Dollars

This is not just a theoretical concern. I have personally seen cases in which clients signed reaffirmation agreements and, within approximately six months of filing bankruptcy, fell behind on their automobile payments.

The lender repossessed the vehicle.

But because the clients had reaffirmed their loans, the financial consequences did not end when the cars were taken away.

The vehicles were sold at auction, and the clients remained personally liable for substantial deficiency balances.

Think about all the expenses that can be added to an automobile loan after repossession:

• The unpaid loan balance.
• Repossession charges.
• Towing and transportation expenses.
• Storage fees.
• Costs associated with preparing the vehicle for auction.
• Auctioneer fees and other permitted expenses.

The lender applies the auction proceeds to the debt, but those proceeds may be far less than the amount owed. The remaining balance, together with allowable charges, can leave the former vehicle owner facing a significant debt.

Imagine filing bankruptcy to eliminate your debts, only to lose your vehicle six months later and discover that you still owe thousands of dollars on a car you no longer possess.

That is a very real risk of reaffirmation.

3. You May Owe More Than Your Car Is Worth

Another factor I examine is the relationship between the vehicle’s market value and the outstanding loan balance.

Vehicles generally depreciate over time. Some depreciate particularly quickly.

If you owe $25,000 on a vehicle worth only $17,000, you are $8,000 underwater before accounting for any future depreciation.

Reaffirming that loan means accepting continued personal responsibility for the debt, even though the collateral is worth substantially less than what you owe.

If your financial circumstances change and you can no longer afford the payments, you may be stuck with a vehicle that is difficult to sell and a loan balance that exceeds its value.

That does not automatically mean you should surrender the car. In Michigan, where reliable transportation is so important, keeping a vehicle may be the best practical choice.

But it is another reason to think carefully before agreeing to remain personally liable for the loan.

4. You May Not Need to Reaffirm to Rebuild Your Financial Life

Some debtors are concerned that they must reaffirm their automobile loans to rebuild their credit.

Credit reporting practices vary by lender. Some lenders may continue reporting payment activity after bankruptcy, while others may handle post-discharge payments differently. You should not assume that signing a reaffirmation agreement is necessary to improve your credit.

I encourage my clients to look at the entire financial picture rather than make a potentially risky legal commitment based solely on concerns about credit reporting.

The objective is to obtain a fresh start, keep necessary transportation when practical, and avoid unnecessary financial exposure.

Myth: You Can Reaffirm Your Car Loan Even If You Are Behind on Payments

Reality: In most cases, you need to be current on your automobile loan to reaffirm it.

In my experience, automobile lenders generally expect the loan to be current before they will agree to reaffirm it. The precise requirements depend on the lender and the circumstances of the case.

If you are behind on payments when you file bankruptcy, reaffirmation may be more complicated. You may need to bring the loan current, negotiate with the creditor, or consider another option.

This is one of the reasons I review each case individually. I want to understand where you stand with the lender, what the agreement would require, and whether reaffirmation actually benefits you.

Signing an agreement simply because the lender asks you to do so is not a sound strategy. You should understand the consequences before making that decision.

Are There Situations Where Reaffirmation Makes Sense?

Absolutely. Although I generally lean toward not reaffirming automobile loans, I do not believe that every reaffirmation agreement is necessarily a mistake.

There are circumstances in which reaffirmation may be appropriate.

When the Lender Will Not Allow a Ride-Through

Some lenders take the position that a debtor must reaffirm the automobile loan to retain the vehicle after Chapter 7 bankruptcy. Certain creditors may be less willing than others to allow a debtor to retain and pay without reaffirmation.

If your lender will not permit a ride-through, we need to evaluate the practical consequences of not signing the agreement.

I would consider whether the vehicle is essential, whether the payments are affordable, whether the lender is likely to repossess the vehicle, and whether a replacement vehicle would be a realistic alternative.

The answer depends on the facts.

When the Loan Terms Are Favorable

Suppose you have a reliable vehicle, an affordable monthly payment, a reasonable interest rate, and a loan balance that is consistent with the vehicle’s value.

If you have stable income and can comfortably afford the payments, reaffirmation might be a reasonable option, particularly if the lender will not allow a ride-through.

Even then, I would want to make sure that the client understands the risks and that the decision is consistent with the goal of obtaining a fresh financial start.

When Reaffirmation Offers a Genuine Opportunity to Renegotiate

In some rare situations, it may be possible to negotiate better terms as part of a reaffirmation discussion. For example, a lender might agree to modify the interest rate, monthly payment, or repayment period. I used to modify contracts through reaffirmations quite frequently when I first started practicing in the early 1990’s, however these days, most car lenders are unwilling to negotiate.

However, debtors should not assume that a creditor will agree to reduce the principal balance or offer more favorable terms simply because a bankruptcy case has been filed.

Any proposed changes should be evaluated carefully. The important question is whether the revised agreement actually improves your financial position enough to justify retaining personal liability.

What About the Bankruptcy Court and Attorney Approval?

Federal bankruptcy law, including Section 524 of the Bankruptcy Code, establishes requirements for reaffirmation agreements.

When a debtor is represented by an attorney in connection with reaffirmation, the attorney generally must certify that the agreement does not impose an undue hardship on the debtor or the debtor’s dependents and that the debtor has been fully informed of the legal consequences.

There are additional requirements when a debtor is not represented by an attorney in connection with the agreement, and the bankruptcy court may need to review certain reaffirmation agreements.

These safeguards exist for an important reason: reaffirmation is a serious financial decision that can leave a debtor liable for a debt that would otherwise have been discharged.

If I conclude that a proposed reaffirmation agreement would create an unreasonable financial burden, I will explain my concerns and advise my client accordingly. I do not believe that clients should sign these agreements without understanding what they are giving up.

What Are Your Alternatives to Reaffirming Your Car Loan?

Depending on your circumstances and the lender’s policies, there may be several alternatives.

1. Keep the vehicle and continue making payments without reaffirmation.

When the lender permits a ride-through, this may be the most attractive option. You continue paying the loan and retain the vehicle without voluntarily reinstating personal liability for the discharged debt.

2. Surrender the vehicle in bankruptcy.

If the payments are too expensive, the vehicle is unreliable, or the loan terms are unfavorable, surrendering the vehicle may be the best financial decision. Your personal liability for a dischargeable deficiency will generally be eliminated through bankruptcy, provided you do not reaffirm the debt and receive the applicable discharge.

You can then explore purchasing a more affordable replacement vehicle.

3. Consider redemption.

Under Section 722 of the Bankruptcy Code, an eligible individual debtor may be able to redeem certain personal-use tangible property, including a qualifying vehicle, by paying the lienholder the property’s allowed secured claim value in a lump sum.

In practical terms, redemption may allow you to keep a vehicle by paying its qualifying current value rather than the entire outstanding loan balance. However, you need to have access to the required funds, and the legal requirements must be satisfied.

Redemption is not practical for every debtor, but it can be worth considering when the vehicle is significantly underwater.

My Advice to Michigan Bankruptcy Clients

After 35 years of practicing bankruptcy law, I understand that every client’s situation is different.

I also understand that in Metro Detroit, a car is often not a luxury. It is how you get to work, take your children to school, shop for groceries, and manage everyday responsibilities.

My goal is to help you protect your ability to get where you need to go while taking full advantage of the financial relief bankruptcy law provides.

That is why I evaluate reaffirmation agreements individually. I consider the vehicle’s value, the loan balance, the monthly payment, your income, your other expenses, the lender’s policies, and the likelihood that you can continue making payments over the long term.

My general preference is to avoid reaffirming a car loan when you can keep the vehicle without doing so.

I have seen what can happen when someone reaffirms a loan, loses the vehicle a few months later, and is left with a substantial debt that bankruptcy was supposed to eliminate.

I want my clients to avoid that outcome whenever possible.

If you are considering Chapter 7 bankruptcy and have a car loan, do not assume that you must sign a reaffirmation agreement simply because your lender sends you paperwork. Before signing, make sure you understand your options and the potential consequences.

The right decision can make a meaningful difference in protecting your fresh financial start.

Contact My Office to Discuss Your Car Loan and Bankruptcy Options

If you live in Oakland County, Macomb County, Wayne County, or elsewhere in the Eastern District of Michigan and are considering Chapter 7 bankruptcy, I can help you evaluate your options for keeping your vehicle.

I am Walter Metzen, a Board-Certified Specialist in Consumer Bankruptcy. I have practiced exclusively in bankruptcy law for 35 years and have represented more than 25,000 people facing financial difficulties.

Call my office at 313-962-4656 to discuss your situation and determine whether reaffirming your automobile loan makes sense for you.

You deserve a fresh financial start, and you should not take on unnecessary financial risks without understanding the alternatives.