Filing Chapter 7 bankruptcy may allow certain unsecured debts to be discharged, but secure debt, such as a car loan, will not be discharged. In fact, if you fail to make payments on secure debt the creditor can simply take the property back.
If you have purchased property and you are making monthly payments, you have agreed that the property will serve as collateral for your loan. In some cases, not only does the creditor have the right to repossess the property, they can also sell the property. If the property is sold and the value it sold for is less than the loan amount, they can also obtain a court judgment against you (a deficiency judgment) and force you to pay the deficiency.
Filing Chapter 7 what are my options for my car loan?
So what happens to your car loan if you decide to file bankruptcy? If you file Chapter 7 bankruptcy the secured loan will not be discharged in Chapter 7, but you do have several options.
- Surrender the car back to the creditor.
The first option if you have a car loan is to surrender the vehicle directly back to the lender. The creditor will generally sell the car and use the proceeds from the sale to repay your loan. If the car sells for less than the loan amount there will be a deficiency balance, but this balance can generally be discharged in the Chapter 7 bankruptcy.
- Keep the car and reaffirm the debt.
The second option if you want to keep your car is to reaffirm the car loan. In some cases, the lender may require that you sign a court-approved reaffirmation agreement, which is considered a contract and legally enforceable in court. If you breach the terms of your reaffirmation contract the creditor has the right to repossess your car.
Creditors who do not require a reaffirmation agreement will allow you to keep your car and simply continue to make car payments. Although this may be simpler, some lenders will require you to keep track of the payments.
- Keep the car by redeeming it.
Finally, a creditor may allow the debtor to redeem their car. Under this process the creditor will reduce the value of the vehicle to the car’s current market value. For example, if you owe $25,000 but the car is only worth $20,000, the creditor may allow the balance to be reduced by $5,000 and create a post bankruptcy loan. The court must approve the motion to redeem the loan.
Talk to a bankruptcy lawyer
Due to the complexity of bankruptcy laws, if you have property you would like to keep it is important to understand all of your options. Filing Chapter 7 bankruptcy will not discharge secure debts. In fact, in many cases it will allow a trustee to take your property and sell it, using the proceeds of the sell to repay your creditors.
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