Your Auto Loan
This memorandum describes the three choices you have about how to deal with your auto loan in your Chapter 7 case. You must be the judge of which of these choices is best for you.
There are a few basic facts you should know to decide which choice is right for you. When you bought the car, you signed a promissory note. In the note, you promised to pay a certain amount of money in monthly installments. Your obligation to make those payments will be discharged in your bankruptcy unless you pick the "reaffirm" choice described later.
You also signed a security agreement giving the lender a "security interest" in the car until you payoff the loan. The lender's interest is noted on the title certificate, which is how the lender makes sure you don't sell the car to someone else without first paying off the loan-any buyer would want to get a clean title, but won't be able to because of the security interest noted on your title. Your insurance policy also names the lender as the primary insured party for damage or theft because the lender has the right to decide whether and how any insurance proceeds should be applied. The lender' security interest will normally not be affected by a bankruptcy. That means that the lender will usually keep the right to repossess the car for nonpayment. Were it not for bankruptcy, if the total amount you borrowed was more than $2,000, the lender also has the right to sue you for the amount (called a "deficiency") they lose after repossessing and selling the car.
When you file a bankruptcy case, however, an "automatic stay" goes into effect that requires your auto lender to get permission from the Bankruptcy Court before attempting to repossess the car. So long as you keep up the payments, the court will not grant permission. But, if you are behind in your payments when you file bankruptcy, or if you fall behind after filing, the court will nearly always give permission to the lender.
Choice 1: Surrender
You may choose to "surrender" your car to the lender in full satisfaction of the loan. Your bankruptcy discharges your obligation to make payments and your obligation to make good any deficiency between the value of the car and the amount you still owe.
Surrender is often the best choice when you owe a lot more on the loan than the car is currently worth, such as when the car has been damaged in a wreck or when you rolled over the unpaid balance on your trade-in into the loan on your present car.
To accomplish a surrender, we will tell the lender on the "Statement of Intention" we file in your case that you intend to surrender the car. You must actually deliver possession of the car before 30 days after first date set for the meeting of creditors under section 341(a). The lender cannot force you to deliver the car any sooner than that. We usually ask the lender to arrange to pickup the car from you at a time when it's convenient to you. Until then, you must keep the car insured. If you park it on a public way, you must keep the plates on it, too.
Choice 2: Redeem
You may instead choose to "redeem" the car by paying the lender its fair market value. When you redeem the car, you (or whoever loans you the money to redeem it) end up owning the car. The lender cannot ask you to pay any deficiency.
Redemption is often the best choice when you owe a lot more on the loan that the car is currently worth and you have enough cash or can borrow enough cash.
To accomplish a redemption, we will tell the lender on the "Statement of Intention" we file in your case that you intend to redeem the car. You must actually tender the fair value of the car within 30 days after the first date set for the meeting of creditors under section 341(a). I can help you find a "redemption loan" to facilitate the redemption process.
I will charge you additional fees for assisting with a redemption because a court proceeding will likely be necessary.
Choice 3: Reaffirm
Your third choice is to "reaffirm" the car loan. Reaffirming the loan means agreeing with the lender that you will personally payoff the loan, usually according to the original payment schedule. If you default on the reaffirmed loan, the lender can repossess and sue you for the deficiency, just as if you had never filed for bankruptcy.
To accomplish a reaffirmation, we will tell the lender on the "Statement of Intention" we file in your case that you intend to reaffirm. The lender will send a reaffirmation agreement to me, and I will send it to you for signature. It goes back to the lender, who then files it with the court along with a motion to approve it.
To be effective, a reaffirmation agreement must be made before the discharge enters in your case (generally about three months after filing) and must be filed with the court. Even when you sign a reaffirmation agreement, you have until the later of the date you are discharged and 60 days after the agreement is filed with the court to cancel the agreement.
