You are likely reading this article because you have a monthly car payment and other bills you are having trouble paying, and you are considering filing for bankruptcy. You may have heard that filing a bankruptcy petition entitles you to modify your car loan and pay less for your car than you promised to pay when you purchased it. This is true, if certain conditions are met. For example, when you file a Chapter 13 petition, “cram down" may be available and this is addressed in another of my guides, Keep Your Car and Lower Your Payment with Chapter 13 Cram Down. This article addresses the effect of filing a Chapter 7 bankruptcy petition upon your obligations under a retail installment contract for the purchase of an automobile. In other words, this article will tell you the basics of how you may be able to pay less for your car and keep it when you file a Chapter 7 bankruptcy petition.
If after reading the introductory paragraph you realize you need to know more about the difference between filing a petition under Chapters 7 and 13 of the Bankruptcy Code, please read the guide Considering FIling Bankruptcy? for some basic bankruptcy concepts and an introduction to Chapter 7 and Chapter 13.
Redeeming a Car Under Chapter 7
The Bankruptcy Code provides that a Chapter 7 debtor can “redeem" his or her car by paying the creditor what the car is currently worth, in a lump sum. While this option may seem on its face to be impractical, considering that in theory folks file for bankruptcy because they do not have enough money to pay their bills, actually, redemption is commonly used when the car’s current value is fairly low and the possibility of the debtor obtaining another car at that price is small. As far as valuation of the car for redemption purposes goes, your attorney can assist you with assessing the condition of your car and negotiating a mutually acceptable value with your creditor.
Reaffirmation of an Auto Loan
If a Chapter 7 debtor is unable to come up with a lump-sum payment, or, if the debtor has “equity" in the vehicle (i.e., owes less than what the car is worth), the debtor might consider “reaffirming" the debt in order to keep the car. Reaffirmation requires the execution of a reaffirmation agreement between the debtor and the creditor which sets forth the terms of the loan going forward, and the debtor’s attorney must review the agreement and sign off on it otherwise it is subject to the scrutiny of the bankruptcy court. Often your attorney can obtain more favorable loan terms under the reaffirmation agreement than your original loan terms, by negotiating with the creditor over the length of the loan, the interest rate, and the amount of the monthly payment.
Before we conclude, please take note of this important caveat: this guide is not legal advice, nor is it intended to be legal advice. The purpose of this guide is merely to illustrate the possible advantages of filing a Chapter 7 bankruptcy petition and a Chapter 7 debtor’s options of redemption and reaffirmation. These are but two ways in which the Bankruptcy Code can be a powerful tool for an honest but unfortunate debtor like yourself, when utilized fully. An experienced bankruptcy attorney can guide you through the intricacies of redemption and reaffirmation and ensure that you pay only what you need to pay for your car and no more.