When filing Chapter 7 bankruptcy, a debtor may face several tough choices. One of those is whether to reaffirm a vehicle loan, or surrender the vehicle. If the debtor surrenders the vehicle, the loan is discharged even if the loan balance exceeds the value of the vehicle. If the debtor wants to retain a vehicle that has a secured loan, he/she must reaffirm or redeem the loan in order to keep the vehicle without risk of repossession.
The debtor must then continue to keep the loan current. If there is no loan on a vehicle, and the value of the vehicle can be exempted through the bankruptcy, the debtor will list the vehicle as an asset, cite the applicable exemption and then keep the vehicle.
To redeem a vehicle loan, a debtor must pay the full value of the vehicle (a value that must be agreed to by the lender or determined by a judge at a hearing). The payment will pay off the loan even if the loan balance is higher than the vehicle value. This is a good strategy if the car value is much lower than the loan balance, and if the debtor has enough cash available to pay off the value of the car.
To reaffirm a vehicle loan, which is the most common choice, the debtor will contact the lender to advise them of the debtor’s intention to reaffirm. The lender will usually prepare a reaffirmation agreement for the debtor (and their attorney) to sign. After the agreement is signed, the lender files the agreement and it must be approved by the judge. If the creditor is a credit union, the judge’s approval is not required.
Reaffirmation of a vehicle loan leaves the debtor liable for the full loan balance even while other debts (like credit cards) are discharged through the bankruptcy. Thus, if payments are missed after the bankruptcy is over, and the lender repossesses the vehicle, the debtor will be responsible for any deficiency if the car is sold for less than the remaining loan balance.
Since many debtors have loans that exceed the value of their vehicle, a reaffirmation can have negative consequences if the debtor later defaults. However, most debtors are reluctant to give up their vehicle for a variety of reasons and believe they can maintain the payments. It is best to discuss your options with an attorney to fully understand the advantages and disadvantages of a reaffirmation before making that decision.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.