Reaffirmation vs. Redemption -- Two Ways to Save your Car in Bankruptcy
In a Chapter 7 bankruptcy, you have two primary options that will allow qualifying debtors to save their cars. These options are known as Reaffirmation and Redemption. Some lenders may also allow you to simply continue to pay without entering in to a reaffirmation agreement or redeeming the vehicle. However, some lenders will repossess your vehicle if you do not reaffirm or redeem, even if you are current with your payments. Moreover, unless you reaffirm or redeem your vehicle, you will typically not receive positive feedback on your credit report for the payments that you are making. You should consult with your attorney regarding the risks before making a final decision.
There are benefits and detriments to reaffirmation and redemption. The highlights are outlined below:
Reaffirmationa llows you to enter into a new contract with your existing lender that survives the bankruptcy. By reaffirming a debt, you will typically be bound to pay the debt on the same terms that existed before the bankruptcy. The amount you owe, the interest rate, the monthly payment and the duration of the agreement typically remain unchanged. Generally, you must be current on your loan in order to reaffirm the debt.
Redemption allows you to wipe out an existing loan by paying the value of the collateral (notwithstanding the amount actually owed) in a lump sum. If you don’t have the money to pay this amount, there are several lenders who specialize in redemption loans for people in bankruptcy. In this situation, you would obtain a new loan for less money than you currently owe. Redemption can save significant money if the amount owed on the original loan is much higher than the value of the car (depending upon the interest rates and other factors). You do NOT need to be current on your existing loan to qualify.