If you have a car when you file for Chapter 7 bankruptcy, you could find yourself with a big decision to make. In many cases, a bankruptcy filer can choose to either keep the vehicle or surrender it to the lender. Your best course of action will depend entirely on what works best for your situation.
Chapter 7 Bankruptcy and Your Vehicle
If your vehicle is paid off, it is very possible that you will be allowed to keep it after declaring bankruptcy. Its value just has to be below your state's vehicle exemption amount. If, however, your car is worth more than this amount, you may have to surrender it as part of the bankruptcy.
On the other hand, if you are still making payments on the vehicle, you can do one of two things. You can either give the car back to the lender and assume no liability or hold on to the car and continue to make payments. In order to keep the vehicle, you will need to prove to the court that it is in your best interest to do so.
Surrendering Your Car in Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, walking away from a car that you are still making payments on is relatively simple. You list the lender on your filing statement and check the box that indicates that you intend to forfeit the vehicle. If you do this, you will not be responsible for the car loan after you are discharged from your bankruptcy.
Likewise, if you are leasing a vehicle before filing for Chapter 7 bankruptcy, you will be permitted to walk away from your lease contract.
Keeping Your Car in Chapter 7 Bankruptcy
Probably the easiest way to hold on to a car that you still owe money on during bankruptcy is through redemption. With redemption, you pay the trustee of the current value of the vehicle in one lump sum. This is a good arrangement for those who are underwater because the filer only has to pay for the current value of the car even if they owe much more.
For example, if you owe $8,000 on your car loan, but the vehicle is only worth $4,000, if you pay $4,000 to redeem the car, you won't be responsible for the rest of the loan balance. If you have the cash to make the necessary lump payment, you can redeem your car whether or not you are behind with your payments.
If you are current with your payments, but cannot afford to redeem your vehicle, you can continue to make payments by entering into a reaffirmation agreement. Even if you are not caught up in your payment schedule, getting a reaffirmation agreement is possible, but your lender is under no obligation to work with you.
Negotiating a Reaffirmation Agreement
If you can afford to make the payments and are sure that reaffirming the car loan is your best option, you will make this known on your bankruptcy filing statement. The lender will then send you an agreement that may be the same as or similar to your original loan contract. At this point, you may be able to negotiate a better deal.
The lender knows that you have the option to surrender the car and assume no liability. This will usually cause them to lose money, so it is in their best interest to negotiate. Ideally, you will want to request that the principal of the loan be reduced to the vehicle's current value. If the lender will not agree to this, you might want to give up the car and let the bankruptcy eliminate your liability.
Getting the Reaffirmation Agreement Approved by the Court
If you and the lender agree to the terms of the reaffirmation agreement, you will need to sign it and file it with the bankruptcy court. A hearing will be scheduled so that the judge can decide whether or not the agreement suits your interests. In making a decision, the judge will consider your income, what you owe on the loan and the car's value.
If it seems to the judge that the terms of the reaffirmation agreement will create too much of a hardship for you, the agreement could be rejected. Remember that the whole point of filing for Chapter 7 bankruptcy is to eliminate the burden of your debt. So the court will be hesitant about allowing you to sign an agreement that could overextend your budget.
It should be noted that if you have an attorney representing you, this person is permitted to sign a reaffirmation agreement. If your lawyer does sign the agreement, they are indicating to the court that agreeing to the new contract is in your best interests. With this consent, you will be allowed to bypass a court hearing. You will just need to file the signed agreement and the court will automatically approve it.
Financing a Car after Chapter 7 Bankruptcy
If you are being discharged from your bankruptcy and you're without a car, or if it is just time to buy a new one, you may be worried that damaged credit will prevent you from getting approved for financing. This is where Auto Credit Express can help. We can match you with a dealership in your area that is connected to lenders qualified to work with post-bankruptcy car buyers.
Our process is fast and our service is free of charge. You are under no obligation when you fill out our simple and secure online application. There is nothing to lose except another day without a car, so go ahead and get started today.