The major change in bankruptcy law in 2005 called BAPCPA eliminated the choice to "retain and pay" your car loan when filing bankruptcy. This means that car lender can repossess your car even though you are current on your car payment just because you filed for bankruptcy. However, the reaffirmation agreement preserves the car contract after bankruptcy filing, thereby, preventing car repossession if you are current on your car payment. In order words, the reaffirmation agreement waives the discharge and puts both lender and borrower back in the legal position before bankruptcy filing. Because you waive the discharge on the car loan, the car lender not only can repossess your car but also sue for the deficiency, working to the lenders' benefits. If you did not sign the reaffirmation agreement and your car was repossessed, the car lender could not sue you for the shortage of funds received from auctioning your car because you are protected under the bankruptcy discharge. The bankruptcy discharge only allows the lender to go after the collateral if you did not sign the reaffirmation agreement.
If your car is on its last leg or you cannot afford your car payment, you should NOT sign the reaffirmation agreement because you will be on the hook for the balance of the car loan plus interests and costs.
Some car lenders are willing to let you "retain and pay" your car loan without signing the reaffirmation agreement because they would rather take your money than your car, which usually has negative equity. However, if you have a lot of equity in your car, which is in good condition, and you can afford the car payment, you might want to consider signing the reaffirmation agreement to avoid the possibility of repossession. Speak to a Sacramento Bankruptcy Attorney for more information.
Reaffirmation agreement is applicable in Chapter 7 Bankruptcy and not in Chapter 13 Bankruptcy.