When filing Chapter 7 bankruptcy, a debtor may have several tough choices. One of those choices is whether to “reaffirm” a car/truck loan, or surrender the vehicle. If the debtor surrenders a vehicle, the entire loan is discharged (eliminated), even when the loan balance exceeds the value of the vehicle. However, if the debtor wants to retain a vehicle that has a loan secured by that vehicle, he must reaffirm or redeem the loan in order to keep the vehicle. NOTE: If there is no loan, and the value of the vehicle is within the California exemption amounts, the debtor only needs to list the vehicle as an asset and may retain the vehicle.
To “redeem” a vehicle loan, a debtor must pay the full value of the vehicle (which must be agreed to by the lender or determined by the Judge if there is no agreement), and that will pay off the loan (even if the loan balance is much higher). 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 more common, the debtor must contact the lender to advise them of the debtor’s intention to reaffirm. The lender will usually prepare a reaffirmation agreement, which needs to be filed and approved by the Court and/or signed by the attorney (if the debtor has an attorney).
The significance of reaffirming a car/truck loan is that after the bankruptcy is over and the debtor has a received a discharge of his/her debts, the loan on the vehicle will still be in force. That means that if payments are missed in the future and the lender repossesses the vehicle, the debtor would still be liable for any difference between the loan balance and the amount the creditor receives when they sell the vehicle.
Because many debtors have car loans that exceed the value of the car/truck, a reaffirmation of the loan can have negative consequences in the future if payments are missed. On the other hand, many debtors are reluctant to give up their car for a variety of reasons. It is best to discuss your options with an attorney to fully understand the advantages and disadvantages of reaffirmation before making a decision.
For more information or a consultation, please call 661-210-5657 or e-mail mjf4bk@ca.rr.com .