Cars / Automobiles in Bankruptcy
How your cars are handled in bankruptcy
When it comes to filing for bankruptcy and your vehicle, you will have to make a choice whether you are going to give up your vehicle or hold on to it by continuing to make payments. Once you have decided, you will inform everyone by filing a Statement of Intention (SOI) in a Chapter 7 or listing it in the Plan in a Chapter 13. If you have a lease, you have the option of rejecting it on your SOI/Plan or keeping your vehicle by assuming the responsibilities of the lease.
If you decide to walk away from your vehicle, you will be cleared of liability on the debt.
In a Chapter 7, if you decide to keep your vehicle, regardless of what is happening with your bankruptcy case, it is important to do everything in your power to continue making payments on it. You also have the opportunity to redeem the car – by either paying off the lender for the current value of the car in one lump sum (if you can afford it) or entering into a new contract for that value with a new lender.
If you keep the vehicle and do not redeem, your creditor will ask you to reaffirm the debt, in which case you would continue making payments under and being liable on the initial contract. If you end up keeping your car and continue to make payments as part of the initial contract, the lender will still have the power to repossess your car if you default on payments, and will sue you for the balance due. If you decide not to reaffirm, you are no longer liable for the car and can keep it as long as you continue to pay, and can surrender at any time without being liable for the difference. In an effort to get you to reaffirm, the creditor will not report your monthly payments to the credit bureaus, which can slow down the recovery of your credit score.
The following course of events will happen if you decide you want to reaffirm your car loan:
- On the Statement of Intention, state that you want to reaffirm the initial contract, also called the promissory note. You will then receive an agreement from your lender, which your attorney will want to try to negotiate.
- When you have reached an agreement with your lender, you will sign and then file with the court. A judge will then decide whether this agreement should be enforced.
- If a bankruptcy court judge approves the reaffirmation agreement, you will be liable under this contract once your case ends.
In a Chapter 13 bankruptcy, you will no longer make the car payments. The payments will be included in your monthly payment to the Trustee. This is usually to your advantage as you can reduce your interest rate to around 4.5%, and can often reduce the principal owed on your vehicle to a much lower amount. There is no reaffirmation or redemption in a Chapter 13.