Auto Loans and Chapter 7
If you are considering a Chapter 7 bankruptcy filing and you have an auto loan, you will have a few options to weigh in connection with your decision to retain or surrender the vehicle in your bankruptcy case.
1. Surrendering the Vehicle. Many Chapter 7 bankruptcy clients decide that a fresh start from all debts is the most desirable path for their bankruptcy case. In order to avoid further payment on their auto loan, Clients will choose to surrender the vehicle to the lender in the Chapter 7. By surrendering, the lender recovers the vehicle and the client discharges the auto loan debt along with other dischargeable debt in the Chapter 7 case. It is important to maintain insurance coverage on the vehicle until such time as the vehicle is sold by the lender at auction. Otherwise, if the vehicle is involved in an accident or a claim arises out of the ownership of the vehicle, the title owner may likely be responsible for such claim(s) if there is no insurance. It is also important to obtain written verification from the lender acknowledging the return of the vehicle. I've heard of cases where a vehicle is returned to the lender only for the lender to tow the vehicle and assess towing charges against the owner.
2. Re-Affirming the Vehicle. A reaffirmation agreement is required by certain lenders to retain a vehicle after a Chapter 7 filing. It can also be useful for re-establishing credit after a Chapter 7 bankruptcy filing since payments on a reaffirmed loan will be reported to the relevant credit bureau(s). In most cases, the reaffirmation agreement contains the same terms as the auto loan. Occasionally, a borrower is successful in negotiating more favorable terms with a reaffirmation agreement. A reaffirmation creates a new contract between the lender and borrower. Therefore, if the borrower becomes unable to make payments to the lender after signing the reaffirmation agreement, the lender can repossess the vehicle and assess any deficiency remaining on the loan after repossession to the borrower. A repossession following a reaffirmation will not be subject to the borrower's discharge in the Chapter 7 bankruptcy case. In other words, the debt owed to a lender after a reaffirmation is signed is not eliminated in the Chapter 7.
3. Retain and Pay. Retaining and paying the vehicle loan involves voluntary payments made by the borrower to the lender after the Chapter 7 bankruptcy filing. No reaffirmation is signed if a borrower decides to retain and pay. However, not all lenders will allow the borrower to choose the retain and pay option. Lenders who do not allow borrowers to elect the retain and pay option will require the signing of a reaffirmation or will repossess the vehicle. One advantage of the retain and pay option is the lender is prohibited from obtaining a deficiency judgment against the borrower if the borrower is unable to make payments. A borrower has the ability to return the vehicle to the lender at any time after the Chapter 7 filing if he or she does not sign a reaffirmation agreement.
4. Financing a Vehicle Before Chapter 7. Financing a vehicle before a Chapter 7 filing can result in the sale of the vehicle in bankruptcy if the lender does not file its lien before the bankruptcy filing. We strongly recommend you consult with an experienced bankruptcy attorney before filing a Chapter 7 case if you have or plan to finance a vehicle.
For more information on auto loans in Chapter 7, please feel free to contact Foster Law Offices at (206) 442-9500. If you prefer to submit your inquiry in writing, please email us at: [email protected] We look forward to speaking with you.