Vehicles – Your Options

You can keep your case through Reaffirmation, or a Redemption or Pay and Retain.  Or you may choose to surrender your vehicle and not owe any of the remaining loan.  

Option 1 – Reaffirmation:  You keep your vehicle and you stay liable for that payment until it is paid completely off – just like it was before you filed bankruptcy. You are not taking advantage of the opportunity to eliminate the debt – you are instead choosing to stay responsible for the debt.  Advantages to you are that you can improve your credit score with a reaffirmation and the company will not foreclose as quickly if you occasionally get behind on your payment. Disadvantage to you is that if you cannot make your payments in the future, tough luck, you remain liable on the debt and the bankruptcy will not help you.  

The Reaffirmation Process:  Reaffirmation agreements on secured loans are required by the Bankruptcy. To be valid, a reaffirmation agreement must be filed with the court before your case is discharged.  Additionally, the agreement must not impose an undue burden on you or your dependents, and it must be in your best interest.  If the monthly budget in your bankruptcy petition reflects a negative balance (which most do) you will need to review schedules I and J of your petition and submit documentation showing how you plan to make these payments (ie new job, raise, reducing monthly expenses, etc).  If your plan is to reduce your monthly expenses, we need to know which expenses specifically will change.  We will  review Schedules I and J of your bankruptcy petition together to prepare the reaffirmation for court review. Your payments must be up-to-date prior to submitting the reaffirmation  agreement.

Option 2 – Redemption:  You may owe far more on your car than it is really worth. You want to keep your car, even after you have filed for bankruptcy.  Normally, lenders do let you keep your car, but demand and impose full payment on your current loan.  A redemption allows you to finance your current vehicle through a new loan company and pay only what the car is worth.  If your vehicle’s value is far less than the loan balance, then you may want to consider applying for a redemption loan. 

The Redemption Process To see if you qualify for either program, you may call any lending company.  Some companies specifically work with people in bankruptcy.  You should do your own research to find the best interest rates, but you may start by calling 722 Redemption. The phone number is (888) 721-2800 ext 222. Please tell her that you are working with our office and have the make, model, miles and VIN number of your current vehicle available.  If you like the deal they are proposing, and wish to redeem, please contact us immediately.  We will file a motion to redeem with the court, our fees will be included in the new auto loan, so you do not have to pay us directly for the additional legal work (approx. $700).  Often your existing lender will dispute the fair market value we present to the court and the court will review the evidence each side submitted and decide whose value will be accepted. If approved, you will make your new lower payments to the new lender after the bankruptcy. 

Option 3 – Pay and Retain:  (Keep your current car, do not sign reaffirmation and keep making monthly payments).  Most secured lenders will continue to accept your monthly payments and allow you to keep the collateral even if you haven’t indicated intent to reaffirm your debt. This is known as the “pay and retain” option. It is an informal option not specifically recognized by the Bankruptcy Code.  Retain and Pay is an attractive option if the lender will accept it. However, debtor’s choosing this option must be comfortable with a lack of certainty or predictability. The lender has the legal right to repossess the vehicle at any time even if the payments are current. You will not, however, be responsible for a deficiency balance if they exercise this right. 

There is an increasing trend for finance companies including specifically Ford Motor Credit and Chrysler to repossess vehicles unless you agree to a reaffirmation. Other lenders like Toyota typically feel that it is better to receive monthly payments under the informal “pay and retain” option rather than lose money by selling repossessed vehicles at auction prices. It is possible, however, that you think your lender has decided to continue to accept your payments only to wake up one morning and find your vehicle gone.  Therefore, you must call the lender to confirm that the “pay and retain” option is acceptable to them.  The advantage to “pay and retain” is that if you ever want to give up your vehicle in the future, you will not be liable for the loan balance.  A disadvantage is that if you are ever late with a monthly payment they will likely repossess the vehicle quickly. Another disadvantage is that the lender will not report your  continued payments on your credit reports.  However, it is often the wisest choice and you reduce your future financial risk, and is especially smart with older car that might break down in the next few years. 

Option 4 – Surrender:  (Turn car over to lender and debt will be discharged in bankruptcy)

Your vehicle may be surrendered back to the lender and any deficiency balance owed on the property will be eliminated in the bankruptcy. This is a good option if you are unsure you will be able to make the payments moving forward, or if your vehicle is damaged, or the payments are too high or you owe more than the vehicle is worth. You do not have to return the vehicle until 45-60 days after your 341(a) hearing.  Often we can help you find a new vehicle lender if you want to finance a newer vehicle. 

We have given you a lot to consider, and we have not discussed your particular situation so this is not legal advice. Please email us or call us for a free consultation.