Frequently, my clients asks if they can keep their vehicle in a chapter 7 bankruptcy case. The answer is – it depends.
In a Chapter 7 bankruptcy case, a has three general options for dealing with a motor vehicle that is subject to a security interest, and as with almost everything in life, there are advantages and disadvantages to each of these options.
The first option is surrender the vehicle. You can deliver the vehicle to the secured creditor or park the vehicle at the curb and walk away.
The advantage of this option is discharge of your personal liability for the debt, meaning you don't owe the debt anymore.
The disadvantage of this option is that you are now walking or taking an alternative mode of transportation because you don't have the vehicle anymore.
This option would be most suitable where: i) the debt significantly exceeds the value of the vehicle; ii) the account is delinquent; iii) you cannot afford the payments; and iii) you have alternate means of transportation.
The second option is redeem the vehicle. A vehicle may be redeemed if the vehicle is primarily for personal, family or household use. Redeeming the vehicle means you pay the creditor not what you owe on the vehicle loan, but the value of the vehicle. For example, if the vehicle value is $7,000, but the balance of the vehicle loan is $10,000, then the vehicle could be redeemed for $7000, the value of the vehicle.
The advantage of this option is you keep the vehicle and pay only the value of the vehicle.
The disadvantage of this option is the requirement of a lump sum payment. This is an obvious practical problem, because if your cookie jar is full of cash, then we probably would not be having this discussion. There are a number of businesses that specialize in providing loans for redemptions, but the interest rates and other terms are generally unfavorable.
This option would be most suitable in those cases where: i) the value of the vehicle is significantly less than the loan balance; ii) the debtor has a source of funds from friends, relatives or exempt assets to pay the redemption amount; and iii) the debtor requires a vehicle.
The third option is reaffirmation. Reaffirming the debt means you agree to continue to pay for the vehicle loan in accordance with the original terms of the loan documents.
The advantages of this option are you: i) retain the vehicle; and ii) pay the regular monthly installments rather than a lump sum.
The primary disadvantage of this option is you remain liable for the debt. If you subsequently default and the if the vehicle is repossessed and there is a deficiency, then you remain liable for that deficiency. In addition, you may be agreeing to pay an amount that exceeds the value of the vehicle.
Reaffirmation would be most suitable where: i) the loan balance does not significantly exceed the value of the vehicle; ii) the account is not significantly in default; and iii) you require a vehicle and are confident you can make the required monthly payments.
At Fisher Rushmer, P.A. we draw upon the experience of our lawyers to offer a comprehensive approach to solving financial problems for individuals and businesses. Contact one of our bankruptcy attorneys now to find out how our skills and experience can help solve your legal matters.