When you file Chapter 7 bankruptcy you have three choices regarding your car loan – Surrender the car, Reaffirm the debt, or Redeem the car. Here’s how each option works.
Option 1 – Surrender the car. Under this option, you simply turn over the car to the creditor and owe nothing further on this debt. However, most debtors need to keep their car as it is their only means of transportation. If that’s the case, then there are two other options available to you.
Option 2 – Reaffirm the debt. This means that you sign an agreement stating that you will continue making payments on the loan even after you receive your bankruptcy discharge and that if you do not make all the payments as agreed the creditor can repossess your car, sell it, and sue you for any deficiency. All Reaffirmation Agreements have to be submitted to the Bankruptcy Court for approval, and your bankruptcy attorney has to sign a certification that the terms of the agreement are in your best interests and that you can afford to make the payments. So if you owe $20,000 on a car that is only worth $10,000, it is very unlikely that a Bankruptcy Court is going to approve the Reaffirmation Agreement. However, there may be another option available to you.
Option 3 – Redeem the debt. Section 722 of the bankruptcy code allows a debtor to ‘redeem’ collateral from a secured creditor for its fair market value. That means that if you have a car that has a fair market value of $10,000, no matter how much you owe on the car, you only have to pay the creditor $10,000. However there is a catch to this, and that is the creditor has to be paid in full at the time you redeem the car.
So how do chapter 7 debtors manage to redeem their car assuming they don’t have very generous friends or family members? That’s where a redemption financing company comes in – they loan the debtor the fair market value of the car and in exchange, the debtor agrees to give the redemption financing company a lien on the car and pay back the loan plus interest.
A Motion to Redeem isn’t a simple process and it does have to be approved by the bankruptcy court, but for Chapter 7 debtors who don’t qualify for a reaffirmation agreement, it might be the right solution.
As experienced Georgia bankruptcy attorneys, The Ballard Law Group can evaluate your individual situation and advise you as to which option would be in your best interests. Call us today at (404) 800-9939 to schedule your free initial consultation at either our Atlanta or Lawrenceville office.