Reaffirmation Agreements: Keeping Your Car in Chapter 7

Your Four Options

1. Surrender

You return the vehicle to the lender. Whatever balance remains after the lender sells it is discharged in your bankruptcy. This is the right choice when the car is worth far less than the loan or the payment no longer fits your budget.

2. Redeem

You pay the lender the vehicle’s current fair market value in a single payment, and the rest of the loan balance is discharged. Few people have that cash on hand, but lenders that specialize in redemption financing exist. Their interest rates are high, yet redemption can make sense when the loan balance greatly exceeds the value of the car.

3. Reaffirm

You sign a new contract with the lender, usually on the same terms as the old one, and give up your discharge as to that debt. It is as if you had never filed bankruptcy for that one obligation. If you later fall behind, the lender can repossess the vehicle, sell it, and pursue you for the remaining balance.

4. Retain and pay

You keep the vehicle and continue making the regular payments under the original contract, without signing a reaffirmation agreement. This is often called “ride-through.” Your personal liability is discharged, but the lien remains, so the lender can still repossess if you stop paying. For many California car loans this is now a protected option, as the next section explains.

California’s Retain-and-Pay Law

For years, keeping a car without reaffirming depended on the lender’s goodwill. That changed on January 1, 2023, when Senate Bill 1099 added Civil Code section 2983.3(a)(2) to the law governing automobile sales financing.

For a vehicle bought from a California dealer with financing arranged through the dealer, the statute provides that filing bankruptcy is not a default. The lender may not accelerate the loan or repossess the vehicle simply because you filed bankruptcy or declined to reaffirm, and any clause in the contract saying otherwise is void. As a result, you may generally keep the vehicle without reaffirming, so long as you stay current on the payments and keep it insured.

What the statute does not cover

• Direct loans and refinances. If a bank or credit union lent you the money directly, the statute does not apply, even though the loan is secured by your car.
• Leases. A lease is not reaffirmed at all. It is “assumed” through a different procedure, and it should be discussed separately.
• Out-of-state contracts. A contract signed outside California or governed by another state’s law is outside the statute.

For those obligations the older rule still applies. The lender may claim the right to declare a default and repossess even if you are current, and reaffirmation deserves more serious consideration.

The Risks of Retain and Pay

There is no tolerance for a missed payment

The protection depends on three things: a timely and proper Statement of Intention, payments that are completely current, and continuous insurance. If you fall behind, even briefly, the automatic stay can end by operation of law, and the lender may repossess the vehicle without advance warning and without a court order.

The lender will stop helping you pay

If you do not reaffirm, most lenders cancel online account access and automatic payments and stop sending statements. Some phone representatives will even tell you, incorrectly, that they cannot accept payments because you are in bankruptcy. You must keep paying anyway. Find the lender’s payment mailing address, send a check or money order before each due date without waiting for a bill, and keep proof of every payment. Many repossessions after bankruptcy happen simply because the borrower stopped receiving statements and lost track.

The law is not fully settled

Some creditors argue that federal bankruptcy law overrides the California statute and still requires a debtor to surrender, redeem, or reaffirm. The better-reasoned view is that the California statute controls what counts as a default, so a lender cannot repossess while you are current and insured. No published decision has resolved the question, and a small risk remains that a lender will attempt repossession even on a covered contract. A borrower in that position would have strong legal remedies, but would face disruption while enforcing them.

Reaffirming: Advantages and Disadvantages

Advantages

• Better terms may be available. Because California law has restored borrowers’ leverage, some lenders now offer a lower interest rate, a reduced principal balance, a deferral, or a longer term in exchange for a reaffirmation.
• It removes repossession risk tied to the bankruptcy itself. This matters most for contracts the California statute does not cover.
• A second chance after a default. A lender is more likely to let you reinstate a reaffirmed loan after a repossession. Without a reaffirmation, most lenders demand the full balance.
• Credit reporting. Payments on a reaffirmed loan are reported. Payments on a loan you did not reaffirm generally are not, and the loan shows as discharged.
• Normal servicing. Statements, online access, and automatic payments are restored.

Disadvantages

• You give up the discharge on that debt. If you default, the lender can repossess, sell the vehicle, sue you for the balance, obtain a judgment, garnish wages, and levy bank accounts. Reaffirming revives exactly the kind of liability the bankruptcy was meant to end.
• You give up leverage. Once the agreement is enforceable, the lender has no reason to offer concessions, and your right to walk away from a bad loan without owing the difference is gone.
• A court hearing may be required. See the next section.

Court Review and Your Right to Cancel

A reaffirmation agreement is filed with the bankruptcy court. If your attorney does not certify it, or if your budget shows that the payment would be a hardship, the judge reviews it at a hearing. Most of these hearings in the Central District of California are held by Zoom. The judge confirms three things: that you understand you are waiving your discharge as to this debt, that you know other options were available, and that the lender did not pressure you.

Disapproval is not a failure

Your duty under the Bankruptcy Code is to seek approval of the agreement, not to obtain it. You must answer the judge’s questions truthfully, including, if it is true, that the payment is difficult for your budget. If the judge then declines to approve the agreement as not in your best interest, the prevailing view is that the lender cannot repossess while you remain current and insured, and your personal liability stays discharged.

You can change your mind

Even after signing, you may cancel a reaffirmation agreement at any time before your discharge, or within 60 days after the agreement is filed with the court, whichever is later. Cancellation is made by written notice to the lender. If you have second thoughts, contact us immediately so the notice goes out within the deadline.

Our General Approach

The purpose of bankruptcy is a fresh start. As a general rule we encourage clients to keep their discharge and not to take back the same obligation that contributed to the filing. For a California dealer-financed vehicle, that usually means retain and pay.

Reaffirming is worth considering when several of these are true:

• you have a strong need to keep this particular vehicle and cannot replace it for less than the amount being reaffirmed;
• you are certain you can make every payment;
• the lender has offered something meaningful in exchange, such as a lower rate, a lower balance, or a longer term;
• your contract is not protected by the California statute; or
• you need the loan reported and normal servicing restored in order to rebuild credit quickly.

When a lender sends a proposed agreement, we ask whether it will improve the loan terms in exchange for your signature, prepare the budget the form requires, and go over the decision with you. The decision is always yours.

For the bankruptcy process as a whole, see our Chapter 7 guide.