Most, if not all clients ask me whether they can keep their car when filing bankruptcy. The answer is a resounding YES!
There are two ways to keep a vehicle in bankruptcy. Reaffirmation and Redemption.
1. Reaffirmation
Bankruptcy Code Section 524(c) discusses reaffirmation. Reaffirmation means that you agree to take the debt out of bankruptcy protection and continue to make payments pursuant to your loan terms. It is as if the bankruptcy never existed as it relates to your automobile loan.
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Reaffirmations are voluntary, must be in writing and must be approved by the bankruptcy court (either through your lawyer or a judge) to be effective. Generally, lenders are willing to allow you to reaffirm if you are current with your loan payments. If you aren't current and you have a good lawyer, your lawyer can, most of the time, negotiate a reaffirmation agreement.
However, there is a risk to reaffirmation. If you reaffirm a $19,000 debt on a car worth $10,000, you would still be obligated to pay the additional $9,000 above the value of the car. This means that if you decide to surrender the vehicle (or if your vehicle gets repo-ed), the lender can and will sue you for the deficiency, in this case $9,000.
2. Redemption
Bankruptcy Code Section 722 authorizes a concept called "redemption." Redemption means that a debtor can "buy back" the vehicle from the bankruptcy estate for an amount equal to the secured portion of the loan. To say it differently, if your vehicle is worth $10,000 and you have a $19,000 loan, the secured portion of the loan is $10,000 and the unsecured portion is $9,000. You can therefore redeem (buy back the vehicle from the bankruptcy estate) the vehicle for $10,000.
There is a catch... these redemption lenders (as they like to call themselves) charge a very high interest rate to take on these types of loans. You and your lawyer should carefully examine the terms of redemption loans. In some cases, you can save money but in other cases, the cost of a redemption loan might cancel out the savings you might see from a reaffirmation.
I have one client who has a late model Mercedes E Class. If I recall correctly, the loan was about $60,000. Because of the number of miles on the vehicle, it was now only worth about $25,000. I advised him to redeem the vehicle. This allowed him to keep the vehicle and save $35,000. That was a good day.
Many of my clients are being solicited by these lenders via direct mail after they file bankruptcy... Keep in mind that the rates will be in the high teen double digits and sometimes in the 20% double digits. It simply becomes a math calculation to make the decision to reaffirm or redeem.
My general opinion is that redemption is better than a reaffirmation... it all depends on the facts and circumstances.
What if you choose neither option? Then the bankruptcy court deems that your intention is to surrender your vehicle... which means the lender can repossess the car... and they do.
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