Can I Keep My Car If I File Bankruptcy? Part 2- Debt.

If you have the means to afford a car payment and you don’t have too much equity, then yes.

In my previous blog post I addressed the issue of equity. If you file ch7 bankruptcy and can exempt all of your equity then the Trustee won’t sell it. In this post I’ll address the debt side of things.

If there is a lien on your car that secures a debt, then you have to deal with the debt and lien in a bankruptcy in order to keep the car. There are a few options:

1. Reaffirm the debt: A reaffirmation agreement is an agreement you enter into with the car lender after filing your ch7 bankruptcy case. In the reaffirmation agreement you agree to be bound by the lender’s debt and lien notwithstanding the bankruptcy discharge. The upside is that you can keep your car. Another upside is that lenders will sometimes reduce the interest rate and/or the payment amount on the debt. The downside is that if you get behind on payments, the lender will repossess the car and sell it at auction. If the auction sale price is less than the amount owed you will be responsible for paying the difference.

2. Redeem the debt: In ch7 bankruptcy you have the right to keep your car if you pay the lender the value of the car, even if you owe more than the car is worth. For example, if you owe $20,000 on your car but it’s only worth $10,000, then you have the right to redeem the car by paying the lender $10,000. Once you pay $10,000 the lender has to release the lien. The balance of the debt (ie, the remaining $10,000 that is owed) will be discharged in your ch7 bankruptcy case. The catch is that you have to pay the $10,000 payment in one lump sum. You can’t spread it out over time. Obviously, this is a major obstacle for most people! The good news is that there are several banks that will give you a “redemption loan” to pay off the lender. Talk with your bankruptcy attorney to find the right redemption lender for you.

3. Keep making the payments: Prior to the 2005 amendments to the bankruptcy code this was the most common option. Nowadays, most lenders require ch7 debtors to reaffirm the debt if they want to keep the car. However, some lenders will allow you to keep your car so long as you keep making monthly payments. The downside is that not all lenders will allow this without a reaffirmation agreement. The upside is that, if you ever get to a point where you cannot continue making payments, you can simply surrender the car to the lender and walk away. No matter what the lender sells the car for at auction, you won’t owe the difference because your bankruptcy discharge eliminated the debt.

As a WNC bankruptcy attorney providing debt relief to clients in Asheville, Waynesville, Sylva, Franklin, Murphy, Hendersonville, and the surrounding areas of WNC, we know that most people are concerned about whether they will be able to keep their cars if they file ch7 bankruptcy. Most people can. Call us today to let us talk about your options.

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