Your Car and Chapter 7 Bankruptcy: To Keep or Not to Keep

Most people that I meet with for a bankruptcy consultation have at least one car payment.  A common myth about bankruptcy is that you can keep your vehicle and eliminate the debt.  Not true.  If you owe money on a car you must continue to pay the monthly payment or the bank will be able to repossess the car – even if you are filing for bankruptcy.  Chapter 7 bankruptcy offers you three options on ways to deal with the debt on your car.  You can keep it, surrender it, or redeem it.  Here are the details on what each will mean to you and your bankruptcy case:

Keeping It

If you want to keep your car then you just need to continue to make the car payment.  If you are in bankruptcy and want to keep your car, you have to keep making the car payment and will be required to reaffirm the debt on the car.  After your bankruptcy case is filed your bank will send you or your attorney a reaffirmation agreement.  This is basically a new contract on your car, usually with the same terms as you had before.  By signing this document you are not only agreeing to continue to make the monthly payments but if you can’t make the payments after your bankruptcy case is over the bank will be able to come after you for the balance owed on the car.

This is a big deal because the reaffirmation agreement essentially takes away your bankruptcy discharge for that specific debt.  After you sign the reaffirmation agreement it is submitted to your bankruptcy judge for review.  In Arizona, most of the bankruptcy judges will not sign the agreements as they believe the agreement is not in your best interest.  However, they will issue an order to the bank that says if you continue to make the payments they must accept them and cannot repossess your car.

Surrendering It

Sometimes people just want to get rid of a car.  Either the loan has terrible terms or the car is a piece of junk.  Whatever the reason you can elect to surrender the car back to the bank.  And if your chapter 7 bankruptcy case is discharged you will not owe any money on it going forward.  This is your one chance to just walk away with no future liability.

Redeeming Your Car

Your third option in a chapter 7 bankruptcy is to redeem your car.  This is a handy tool found in chapter 7 that allows you to pay the value of your car instead of what is owed.  For example, if you have a truck that you owe $20,000 on but the truck is only worth $12,000, if you redeem the vehicle you will only have to pay $12,000 and the balance is eliminated through your bankruptcy.  There is a catch…

You have to pay the entire amount in one payment.  So in the above example you can get the truck for $12,000 but you must pay that full amount immediately.  Most people (let alone people going through bankruptcy) don’t have that much cash on hand.  So how do you come up with it?  Some people will loan it from a family member.  If that is not an option there are banks that provide redemption loans.  To qualify for these loans you must be in bankruptcy.  A lender I commonly use is 722 Redemption (www.722redemption.com ).  They are underwritten by U.S. Bank and I have seen good success for clients with them.

Before filing your bankruptcy you and your attorney need to discuss what your plans are with your cars.  Bankruptcy can be a good opportunity to get out of a bad car loan or keep your car and reduce the amount you owe.

Image Credit: Leo Reynolds