When a person files a chapter 7 bankruptcy case, they must make a decision as to what they intend to do with their existing secured vehicle loans. Bankruptcy eliminates the debtor’s personal legal responsibility to repay a vehicle loan but does not eliminate the lender’s lien against the vehicle. Therefore, when a debtor files a chapter 7 case, they must choose whether to keep the vehicle and pay for it, or stop making payments, and surrender the vehicle back to the lender.
If the debtor decides to keep the vehicle, they basically have 3 options: They can enter into a reaffirmation agreement with the lender, they can keep the vehicle and simply continue to make payments, or they can redeem the vehicle.
Typically, when a debtor decides to keep their vehicle, they either enter into a reaffirmation agreement with the lender or simply elect to keep making payments on the loan without signing affirmation agreement. A reaffirmation agreement essentially renews the debtor’s promise to continue making payments on the loan until it’s paid off. In effect, it excepts the vehicle loan from the bankruptcy discharge just as if the debtor had never filed for bankruptcy. Except in rare circumstances, it is typically not in the debtor’s best interest to sign a reaffirmation agreement. This is because vehicles typically quickly lose value over time and debtors can end up stuck with a car loan that leaves them owing much more money than the car is worth. In most cases, it is better for the debtor to just continue making payments on the vehicle loan without signing a reaffirmation agreement, due to the fact that most lenders will simply allow the debtor to keep the vehicle as long as payments are made (aka a “ride through). However, if no reaffirmation agreement has been signed, there is always a slight risk that the lender will repossess the car despite the fact that the debtor is current on payments. In such cases, the debtor is usually better off without the debt anyways.
A less frequently exercised option is for the debtor to redeem the vehicle in order to keep it. To redeem a vehicle, the debtor simply pays the value of the vehicle to the lender and takes the vehicle free and clear from the existing lien. This is an especially good option if the vehicle is significantly “underwater,” meaning that it is worth a lot less than what is owed on the loan. If the lender and the debtor agree on the value of the vehicle, there is no issue with redeeming the vehicle, assuming, of course, the debtor can get financing to pay the entire amount of the vehicle during their chapter 7 bankruptcy case. However, if the lender and the debtor can’t agree on the value of the vehicle, the debtor will need to file a motion with the court asking the court to determine the valuation. When a debtor chooses to redeem a vehicle, they must act quickly. The debtor is required to let the court know what they are going to do in respect to their vehicle loans, in a form call the Statement of Intent, which is filed with their bankruptcy petition. The bankruptcy Code says that the debtor is to perform what they say they are going to do within 30 days after their creditor’s meeting, which typically takes place about a month after their case is filed. Moreover, the bankruptcy code further provides that if the debtor has neither successfully redeemed the vehicle, nor entered into a reaffirmation agreement, within 45 days after their creditor’s meeting, the lender may exercise their right to repossess the vehicle. For this reason, a debtor who wishes to redeem a vehicle must act quickly and should be reasonably assured they will be able to get financing to redeem the vehicle, or they will be left with the option of either signing a reaffirmation agreement or making payments with the hope that the lender will not repossess.
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A person who is considering filing a chapter 7 bankruptcy case is well advised to speak to an experienced bankruptcy attorney before they file their case in order to get the best advice as to how to handle their secured vehicle loans in bankruptcy. Lifeback Law, P.A., now is better able to serve people who live in Saint Paul, as we have recently opened a new office in the historic Cathedral Hill neighborhood, located at 370 Selby Ave., Suite 224, St. Paul Minnesota 55102. Come visit us there or at Lifebacklaw.com!
