How do I redeem a car loan under Chapter 7 law?

Many Americans are turning to bankruptcy as a solution to overwhelming debts they are unable to pay. Job loss and the high cost of medical care have contributed to the increase in bankruptcy filings. When an individual chooses to file Chapter 7, they can wipe out nearly all of their unsecured debts while still holding onto certain assets.

Redeeming or Reaffirming Your Auto Loan

There are only three options when dealing with a vehicle during bankruptcy. The debtor can choose to reaffirm, redeem or surrender their vehicle. A petitioner who files for bankruptcy may protect their car by signing what is known as a “Reaffirmation Agreement”. This replaces the original contract and allows the individual to reaffirm the vehicle loan with the lender. In Chapter 7 car payments must continue to be made by the debtor and each lender may handle the reaffirmation agreement in a different way, depending upon the balance owed and prior payment history. This type of agreement can help the petitioner establish credit more quickly after their bankruptcy is concluded.

If you choose to redeem the vehicle, this means that you must pay the lender what is considered to be the “fair market value” of the car. Debtors who owe more than what the vehicle is currently worth may find this to be an attractive option. They end up paying less than what they owe on the loan while retaining their automobile. The only catch is that they must pay the amount due in one lump sum. Let’s say for example that your car is worth $5,000 and you still owe the lender $10,000. You would have to pay $5,000 in cash in order to redeem the car.

Hiring a Skilled Bankruptcy Lawyer

Dealing with the various options when filing bankruptcy is hard for most people to understand. Choosing whether to keep your car or let it go is a major decision and one that requires some legal guidance. When you are contemplating filing for Chapter 7, it’s best to consult with an experienced bankruptcy attorney for advice.