Keeping A Car Loan Through a Chapter 7
A chapter 7 bankruptcy filing provides a couple of options to deal with a secured debt like an auto loan. “Redemption” and “Reaffirmation” are options that allow the debtor to keep the car during and after the bankruptcy is complete. “Surrender” is the option that allows the debtor to return the car back to the lender during the first few months of the case. Surrender is the option that is most consistent with getting a “fresh start” in a Chapter 7. But a lot of folks in the Rancho Cordova area have a car they like, a decent interest rate, and no desire to give up their vehicle.
Reaffirmation is the most common option to keep a secured vehicle in a Chapter 7 bankruptcy. This is a possible choice for debtors who have a car loan, want to keep the car, and don’t have a large sum of cash to pay for the whole debt right away. Basically, a reaffirmation agreement is an agreement in which a debtor chooses to legally agree to pay all or some of a debt that would otherwise be discharged.
The Bankruptcy Court has great interest in making sure that debtors don’t fall back into the same or similar debt situation as before the bankruptcy. That is why it is important to listen to the advice of a bankruptcy lawyer. If the agreement would place a hardship on the debtor, it’s often not a good idea to enter into one.
In the most basic terms, Redemption allows the debtor to buy the value of the car back from the creditor. The Bankruptcy Code provides that the debtor may pay fair market value of the auto to the creditor. So, if the debtor owes $15,000 for the vehicle and the current fair market value is only $5,000, the debtor can simply pay one lump sum to the creditor to “redeem” the car. This is more rare than reaffirmation, simply because it’s hard for a lot of people to have a big lump sum of money when in the midst of a bankruptcy. But if the debtor has the money available to buy out the loan they can usually save a significant amount of money in the long run.
The so called "ride-through" option is still used today but it is less popular than it used to be. When the debtor elects to do a ride-through they are keeping their car, staying perfectly current on the payments, but not signing any new contracts or reaffirmation agreements. This option is appealing where the debtor is current on the payments but the overall amount of the loan is so large that there is a significant chance of default in the near future. By not signing the reaffirmation agreement the car creditor cannot sue the debtor for the loan amount, they can only repossess the vehicle. So why doesnt every debtor just elect to ride-through on their car loan? The reason is that a car creditor has the right to take the car from the debtor at any moment, even when the debtor is 100 percent current on their car payments. And some creditors will actually repossess the vehicle in this situation just because the debtor did not sign the reaffirmation agreement. For many, this is a scary proposition because they rely on their car to get to work or take their children to school.
Reaffirmation Is a Big Decision
The Sacramento region is a diverse place and consumers with a lot of debt in the area have a wide array of different problems and situations. That is why the advice of an experienced bankruptcy attorney is crucial for a successful fresh start. Only with such expertise and guidance can a debtor make the right informed decision about reaffirmation.