How Chapter 7 Really Works When Reaffirming a Vehicle

Protecting Your Car When You File For Chapter 7 Bankruptcy Protection

If you face insurmountable debt, you can seek to permanently discharge debt by filing for protection under Chapter 7. The bankruptcy laws limit the type of debt that can be discharged, and also require that reaffirm the debt on any cars or vehicles on which there is a lease or purchase loan. If you own a motor vehicle that you want to keep but which is subject to a auto loan or lease (and assuming it does not have such a large amount of equity that it cannot be fully exempted from sale by a trustee) you still have to take certain steps to prevent a repossession after your bankruptcy discharge.

Reaffirming Your Car Loan in a Chapter 7 Proceeding

A reaffirmation is essentially a new agreement to repay the amount owed on your vehicle. To reaffirm a car loan, you will be required to sign an agreement stating that, in exchange for keeping your car, you agree to continue to make the payments on the car and to remain fully liable on the debt. In essence, this agreement takes the loan out of the debts that will be discharged. The bankruptcy court will review the proposed reaffirmation to make certain that the payment is one you can afford, and that having the car payment will not impose an unreasonable hardship on you and your family. If your attorney, acting as an “officer of the court” can certify to the court that the loan or lease is one you can afford based on your income and expenses, approval typically happens as a matter of course. If your attorney cannot do this, the Court will schedule a hearing to question you about the loan and to determine if it will nevertheless approve the loan.

You can also rescind a reaffirmation agreement within 60 days or at any time before your discharge, and return the vehicle without any further obligation.

If you do not agree to reaffirm the loan and offer to do so, the auto lender will have the right to repossess the vehicle even if you are current on payments. Many auto lenders, especially Ford Motor Credit, are vigorous about this. So to avoid the risk of repossession, an offer to reaffirm, and the signing of a reaffirmation agreement when presented, are necessary.

You want to be careful about entering into a reaffirmation agreement. By doing so, you are essentially agreeing that you will remain fully personally liable for all payments or money due under the car loan or lease without the protection of a discharge in bankruptcy. So, for example, if 6 months after your bankruptcy discharge you fall behind on payments and the lender repossesses then sells the car, it can still sue you for any unpaid balance or deficiency. For a lease, if you owe money at the lease end, you will have to pay up.

Of course, you are protected by the automatic stay, and the lender cannot call, write or take legal action to collect car payments from you until your discharge or until it gets an order for “stay relief”. But once this hurdle is crossed, you could lose your car even if you are remaining current on payments.

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

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