What are your options for keeping your vehicle if you file Chapter 7? What if you owe far more than the vehicle is worth – do you have any leverage to negotiate?
There are basically two options. I’ll discuss the first option – reaffirmation – here, and I’ll discuss the second option – redemption – in a separate blog post.
Option one is to “reaffirm” the debt to the lienholder. Reaffirmation is voluntary on the part of the lender and the Chapter 7 trustee must abandon the bankruptcy estate’s interest in the vehicle (if you owe more than the vehicle is worth, the estate will not have any interest in the vehicle).Generally, car lenders are amenable to reaffirmation if you are current with your loan payments. Could a lender refuse to reaffirm even if you are current? Yes, although this is unlikely, unless your payment history or current employment situation is very bad.
When you reaffirm a secured debt in Chapter 7, you are basically taking that obligation out of the bankruptcy process and you are required to continue to pay as if no bankruptcy had been filed. So, if you reaffirm a $15,000 debt on a car worth $4,000, you are basically stuck being “underwater” in your car loan. You would pay the contract rate and after a short (60 day) grace period you can not change you mind.
The reaffirmation process has changed following the enactment of the BAPCPA amendments to the Bankruptcy Code. Now, to reaffirm, your lawyer has to complete a lengthy reaffirmation document in which he asserts that he has reviewed your budget and that he believes that you can afford the reaffirmed payment and that it is in your best interest.
Some bankruptcy lawyers feel very uncomfortable with the assertions set out in reaffirmation agreements because these assertions could, in theory, give rise to liability if the debtor ends up defaulting on payments.
However, the law also now says that if you do elect to either reaffirm or surrender your collateral, your failure to choose an option will serve as an implied decision to surrender.
As a practical matter, if you go into Chapter 7, you should discuss in detail with your lawyer how you want to deal with outstanding loans on secured collateral. I think that the current law is much less amenable to changing your mind about reaffirmation than was previous law.
Jonathan Ginsberg, Esq.
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Last modified: February 8, 2008