by Kelly M. Resnick, Attorney
Are you struggling with an auto loan with an extremely high balance, extremely high interest rate, or both? (*Even though I refer to “auto loans” in this post, this information applies to any debt secured by personal property, i.e. not real property.)
A Chapter 7 Bankruptcy discharge eliminates the debtor’s personal liability regarding the debt. However, a secured debt has two parts–the debt and the lien. The debt portion is extinguished, but the creditor retains the lien against the vehicle (or other collateral) even after bankruptcy. When you file a Chapter 7 bankruptcy, you have three options when it comes to secured debt: surrender, reaffirm, or redeem.
Surrendering requires you to return the vehicle to the lender without having to repay any of the remaining balance. Reaffirming the debt, in short, removes the auto loan from your bankruptcy and treats the debt like you never filed bankruptcy. So if you default after reaffirming, the lender can both repossess the vehicle and sue you for any deficiency balance. Redeeming means paying the lender the value of the vehicle (or collateral) in one lump sum in exchange for the pink slip to the vehicle. For example, if you owe $10,000 on your car, but the current value of the vehicle is only $4,000. After filing Chapter 7 bankruptcy, you can file a motion with the court requesting an order setting the value of your car at $4,000 and allowing you to pay only this amount to eliminate the full auto loan. The creditor does have the opportunity to object if they believe the value of your vehicle is more, but if that happens, then both parties need to submit evidence of the value and the Court will set a value. However, once you pay the full value approved by the court, the car is yours free and clear of the auto loan!
You might be wondering–this all sounds great, but where do I get the money to do this in one lump sum? Currently, there are lenders that you can approach before filing bankruptcy to be pre-approved for a new auto loan based on the value of your vehicle. So, taking the example from above, if you cannot afford $4,000 out of pocket, you can be pre-approved for a $4,000 auto loan before bankruptcy and then take out the loan after bankruptcy. The new lender pays the old lender the value of the vehicle, and now you have an auto loan for $4,000 and not $10,000. Usually, this means a reduced monthly payment too. If using this scenario, you should know that your bankruptcy does not protect you from your new auto loan. So if you default on the new auto loan, your new lender has the right to both repossess and sue you for the unpaid balance. But on the other hand, if you remain current on this obligation, it immediately helps you rebuild your credit since it is a debt you incurred after filing bankruptcy.
This option may or may not be a viable option, or the best option, for your particular situation so you always want to consult an experienced bankruptcy attorney before making a final decision. If, however, this option does work for you, it could save you hundreds if not thousands of dollars in the long run and allow you to keep your vehicle!
Disclaimer: This piece is opinion based and does not guarantee any particular outcome of a case.