People often ask if they can keep their existing vehicles when they file for bankruptcy. The answer is yes. You can either surrender the car if you do not want to keep it or you can keep it and reaffirm the debt.
If you are current on your vehicle payments the lender will send what is called a reaffirmation agreement for you to sign. Essentially that means you are reaffirming or agreeing to make good on your existing contract with the car lender. The terms of the loans remain the same. You are not refinancing or re-negotiating the terms of the loan or interest rate on the loan.
If you are not confident that you can afford the vehicle payments going forward, we do not recommend signing the reaffirmation agreement because if you default on the loan, the lender can come after you for the deficiency if they sell the car for less than you owe on it. For example, if your car is worth $10,000 but you default and the lender sell it for $8,000, you will owe the lender $2,000 which they can try to collect against you.
Once you execute the reaffirmation agreement your payments should start reporting positively to the credit bureaus that you are making timely payments. This will also help rebuild your credit score once your bankruptcy is complete which is a great opportunity for your fresh start. We can help assess your car value and look at your budget to help you decide the best course of action with your vehicle.
Collateral is when your property can be taken if you do not pay on a debt. It’s also commonly known as secured debt. The most common example of this is a house or a car. For example, if you don’t make your car payment the lender can repossess your vehicle.
If you do not make your mortgage payment, the lender can foreclose and take possession of your house. The most common example of “cross-collateralization” that we see in bankruptcy cases is most commonly employed by credit unions. People have a car loan and an unsecured credit card or personal loan with the credit union – the credit union will make you pay off the credit card or personal loan in order to obtain the title to your vehicle. Its usually up to the amount of equity in the car. For example, your car loan is for $15,000.
The value of your car is $20,000. You have a signature loan with the same creditor for $10,000. The creditor can make you pay $20,000 to obtain title to your vehicle. You always have the option to surrender your vehicle if you don’t want to pay the extra amount added onto the loan by your credit union. The good news is if you surrender your vehicle in the bankruptcy you owe nothing to the car company.
We always recommend having your checking and savings account and/or vehicle at a banking institution where you don’t have any credit lines. If you have any questions or need to make a decision about whether its better to keep your vehicle or pay the creditor we can assist in letting your know the pros and cons.