The ability of a Chapter 7 debtor to keep a vehicle after bankruptcy depends on several factors, including how much the vehicle is worth, how much you owe on the vehicle and how far behind you are on the payments at the time you file for bankruptcy.
In California, you could simply keep the vehicle and continue to make the payments so long as you maintain adequate insurance and are not past due at the time you file your bankruptcy. Recent changes in the bankruptcy make it unclear if this option will still be available for bankruptcies filed on or after October 17, 2005.
Under certain circumstances, you might need to enter into a reaffirmation agreement with the lender. In other cases, you can purchase the vehicle outright from the lender at the fair market value rather than the balance owed.
What is a reaffirmation agreement?
A reaffirmation is an agreement by a Chapter 7 debtor to continue paying a dischargeable debt after the bankruptcy, usually for the purpose of keeping collateral or mortgaged property that would otherwise be subject to repossession. Some lenders might even be willing to give a Chapter 7 debtor a break on the interest rate or the monthly payments.
Lenders will often be motivated to enter into a reaffirmation agreement because they can get more money than if the lender were to repossess the car and sell it. Debtors can benefit if they need to keep the vehicle for transportation.
What is a redemption?
Under the prior version of the Section 722 of the Bankruptcy Code, a debtor was be able to force the lender to sell them the vehicle for the fair market value even if the debtor owes more than the vehicle is worth. For bankruptcies filed on or after October 17, 2005, the debtor must pay the full amount of lien to redeem the vehicle. The problem is most debtors who file bankruptcy do not have ready cash [or a rich relative] to pay the fair market value in one lump sum. There are companies who provide redemption financing. The interest rates can be high, but a redemption loan might allow the debtor to reduced the monthly vehicle payments.
There are a number of companies that offer Section 722 redemption financing such as 722redemption.com and Fresh Start Loan Corporation. If you are considering obtaining financing for a redemption, you should investigate the terms before filing for bankruptcy to make sure that you meet the qualifications for a loan.
This publication is NOT INTENDED TO SERVE AS A SUBSTITUTE FOR LEGAL ADVICE. Please consult with a licensed attorney if you require legal advice.