When considering Chapter 7 bankruptcy, you’re probably worried about what will happen to your car. Here’s some good news: two out of the three options outlined below don’t involve you losing your ride.
Reaffirmation is the first option you are likely to hear about, but it’s the one I like the least.
A reaffirmation agreement is one where you “reaffirm” your debt with the lender and agree to pay the loan as if you haven’t filed for bankruptcy. Sometimes your lender will even offer you better terms to sign the reaffirmation agreement to exclude your loan from the bankruptcy filing. This is usually pretty easy to do, but easy isn’t always best.
In most cases, this isn’t a deal you want to take, because it will lock you into the loan at a time when you’re trying to reduce your financial liabilities, and then leave you vulnerable to a deficiency judgment if you fall behind on payments after filing bankruptcy.
Redemption is the option I recommend for most of my Chapter 7 clients. Unlike in Chapter 13, it is possible under Chapter 7 to pay the fair market value of a vehicle you owe money on (redeem it). Most likely, you would pay this redemption amount in a lump sum.
The way this works is as follows:
You owe $12,000 on your car, but its fair market value is only $8,000. In Chapter 7 bankruptcy, you can “redeem” your car by paying the lender $8,000 and including the remaining $4,000 balance in the bankruptcy discharge.
But, you say, “I’m going bankrupt! Where am I going to get that kind of money to redeem my car?”
You can pay the redemption amount with funds contributed by family and friends or by using exempt assets, or you can use a company like 722 Redemption Funding, which will pay the redemption amount to your old lender and extend a new loan to you for that amount. I have seen clients cut their car loans in half by working with 722 Redemption.
Finally, depending upon your situation, it might work out best to let the car go and start over completely. As long as you surrender your vehicle to the original lender as part of a Chapter 7 bankruptcy, any additional debt you owe on it will be eliminated in your discharge.
I can’t tell which option is best for me!
That’s where an experienced bankruptcy attorney comes in. I can take a look at your complete financial picture and make a recommendation. It’s free to chat with me about your options – you can call or text me at 215.551.7109, or drop me a line.