For most people having reliable transportation is a necessity. A vehicle is required to get to work, school, or to an appointment at the doctor. Most of us can’t imagine doing without a personal vehicle. Filing bankruptcy doesn’t mean you have to give up having a car, truck, or motorcycle.
The first question is whether you have equity in the vehicle you own. Equity is simply the difference between the amount you owe and what your vehicle is worth. If you owe more than your vehicle is worth, you have “negative equity,” which is really no equity at all. The bankruptcy laws allow you to keep a reasonable amount of vehicle equity. If this amount is not enough to fully protect the vehicle, you may use other legal exemptions to protect your vehicle equity. Finally, if you have more vehicle equity than you can legally protect, you can purchase the equity from the Chapter 7 trustee.
The second consideration is your lender. There are three options for dealing with vehicle loans in Chapter 7 bankruptcy: reaffirmation, redemption, and surrender (a controversial “fourth option” is available in some states and circumstances. Speak with your attorney to see if your situation qualifies).
If you wish to continue the monthly payment, you can execute a reaffirmation agreement. This is a contract that states that the debt you owe the lender will survive the bankruptcy and the lender agrees to not repossess the vehicle. In some cases you can use a reaffirmation agreement to rewrite the original agreement. This can be useful if you have missed a few payments or need to reduce your interest rate.
If your vehicle is substantially “upside down,” you may want to consider a redemption. In a redemption, the debtor pays the lender the fair market value of the vehicle. The payment is made in a lump sum which usually requires another loan at a high interest rate. However, for a car that is worth thousands less than what is owed, the new monthly payment could be hundreds less – even with the high interest rate.
The final option is surrender. Sometimes just walking away from a lemon or a bad deal is the best choice. In a Chapter 7 bankruptcy, you simply turn over the car to the lender and owe nothing. There is no prohibition against buying a different vehicle during or after your bankruptcy case. If you need to purchase a different vehicle, speak with your bankruptcy attorney.
The United States bankruptcy laws contain powerful provisions for protecting property and reducing debt. There are many options available in Chapter 7 or Chapter 13 cases. Consult with an experienced bankruptcy attorney and explore your options under the federal law.