You filed bankruptcy. You have a car and you’re current on the payments. But it’s worth a lot less than you owe. In other words, you’re underwater, maybe by thousands of dollars. It’s the only car you have and you need a car. What should you do? Reaffirm or surrender?
Reaffirming means that you sign a new agreement with the lender, usually on the same terms as your old loan. This agreement basically excepts or excludes the car loan from the bankruptcy. It’s as if you didn’t file with respect to that loan. You keep making payments. If you fall behind, the bank can repossess the car. And — this is the really important point — if the bank repossesses and after they sell the car at auction there is still something owed, you’re responsible for that. Your bankruptcy won’t help you.
Surrender means that you give the car back and walk away. If the bank sells it for less than what’s owed, too bad for them because you are protected by your discharge. Of course, you don’t have a car and you’ve just filed bankruptcy, so what do you do about that?
Once you file bankruptcy your mailbox will fill up with offers from car dealers to get you into a new or used car. Often these offers are for exorbitant interest rates, 15%, 18% even 25% or more. But some lenders are being more competitive, offering rates somewhat higher than those for their best customers but still reasonable. What if that rate is more than you now have but you could live with it?
This is where you have to sharpen your pencil and do some evaluating. How much is your current car worth? How much do you owe on it? How much longer do you think it will last? How much longer do you have to keep making payments? Suppose you are under water. Say your car is worth $10,000 but you owe $15,000. Suppose further that it’s four model years old and you have three more years to pay on the car. By the time it’s paid off it will be seven years old (if it makes it that long). What will it be worth then?
Now compare that scenario to the one if you buy a new or used car that won’t put you under water. How long until that is paid off? What will it be worth then? Will this car be more reliable than your old one? Can you handle the new car payment?
Evaluate both scenarios and do what makes the most financial sense. Don’t be governed by emotion. Don’t reaffirm a car loan just because it’s your dream car. And don’t surrender a car that you have equity in and is almost paid off just because you want a newer car.