Published December 28, 2010
Dear Bankruptcy Adviser,
I have 2 cars: my car and my wife's. My car is a 2007 and her car is a 2008. My car payment is $600 a month and I still owe $26,000 or so on it. My wife owes about $10,000 on her car loan. We are thinking of filing for a Chapter 7 bankruptcy. I am wondering how this will work because I would like to keep both cars. Can we get a reduced loan payment?
In general, you can file bankruptcy and keep both cars. The reduced loan payment or any change in the terms of the car loan is also possible inside a Chapter 7 bankruptcy. You have five options when you file bankruptcy with outstanding car loans.
1. Surrender the vehicle. You can turn in the vehicle directly to the lender. Get something in writing to prove you surrendered it. Until then, make sure to keep your car insurance current while the car is in your possession. You don't want to compound your financial troubles with a post-bankruptcy-filing car accident. That debt will not be dischargeable in your bankruptcy if it occurs after the filing.
Once you surrender the car, the lender will sell it, usually for less than the amount you owe. The remaining balance, called the "deficiency balance," should be eliminated in your bankruptcy.
2. Reaffirm your current car loan. Lenders take one of two positions with a car loan. The majority, about 70 percent, require that you complete a court-approved reaffirmation agreement. This is a document filed with the court and signed off by the judge.
A reaffirmation agreement is a legal, enforceable contract filed with the bankruptcy court. It states your promise to repay all or a portion of a debt that may otherwise have been subject to discharge in your bankruptcy case. Some lenders demand you sign this agreement and will not send you statements or report payments to the credit bureau without the court-approved agreement. In many instances, lenders consider it a breach of the terms of your loan and will repossess the vehicle if you fail to sign the agreement.
3. Keep the car and continue making payments. The rest of the lenders will allow you to keep making payments and not complete a reaffirmation agreement. You will need to make sure payments are current and you may not receive monthly statements after your case is filed. It will be up to you to call the lender and determine when the balance is paid off.
4. Redeem the car loan with a new lender. Bankruptcy law permits a car owner to reduce the current car balance to the fair market value. For example, if you owe $15,000 and the car is worth only $10,000 then you may be eligible to reduce the car balance by $5,000 with a new, post-bankruptcy loan.
This is possible for a car that was purchased only days prior to filing for bankruptcy. Only a few lenders offer this service and you can inquire with one of the companies before you file.
A motion to redeem the car loan requires judicial approval. You will apply for the loan with the new lender and that lender will provide a new car loan offer. Then, you will file a motion, along with the offer, with the court. The current car lender will either agree or disagree with the new car loan value. At that point, you will either reach a settlement on the value between the two lenders or will wait for a judicial decision on the fair market value of the car.
5. Negotiate directly with the lender. A few lenders will work with you and lower the balance to the fair market value. You would not need to redeem the vehicle. Credit unions are the most likely to offer this service. Most lenders do not, but it is definitely worth inquiring with the lender once you file.
Before and after filing, you must keep your car payments current unless you intend to surrender the vehicle. Options 2 through 5 exist as long as you are current. You can explore all these options once your case has been filed.
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