In a Chapter 7 bankruptcy, your non-exempt property is liquidated. You’ll have the choice to either keep or surrender your vehicle, but this decision comes down to your financial situation and available funds.
Keeping or Surrendering
If you’re still making payments on a vehicle, it might make sense to surrender your car to the lender. It’s the easiest and least time consuming course to take, but you end up without a car. Once your bankruptcy is discharged, you’re no longer responsible for payment of the loan or lease.
If you don’t want to give up your vehicle, you can choose to keep it. In a best-case scenario, your car is paid off and the value of the vehicle is below your state’s exemption limit by the time you file. But if you choose to keep your vehicle and you still owe money, you’ll have two options to consider: either redeem or reaffirm the car.
Redeeming or Reaffirming
Both options can be tricky, but if you don’t owe a significant amount of money, the best option is to redeem the car. Redemption works if you’re underwater on the loan, but you’ll need to pay the lender the vehicle’s current value all at once. If you list redemption as an option, but don’t have the available cash to pay for the car’s current value, the lender will proceed with the repossession process.
The last option available if you’re unable to keep the vehicle by redeeming, but are current with payments, is to enter a reaffirmation agreement. In a reaffirmation agreement, you’ll discuss payment options with your lender in order to carry the loan through the bankruptcy. The lender will send you an agreement letter similar to the original loan, and from there you can negotiate the principal. Not all lenders are willing to work with a borrower and are under no obligation to help, but it doesn’t hurt to try and negotiate with them.
When dealing with a Chapter 7 bankruptcy and your car, it comes down to whether or not you’re behind on your payments. Even if your payments are up to date, creditors may still make you pay the remaining balance to keep the vehicle. If you’re tight on money, you may not be able to afford this, making you carless.
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