Chapter 7 Bankruptcy and Your Secured Debts
A secured debt is one in which in which you essentially made two agreements with your creditor, the first involving the debt, the second involving the collateral. 1) You agreed to pay the amount you owe under certain terms, and 2) you agreed to surrender the collateral if you don’t pay the debt under those terms.
A Chapter 7 “discharge” (legal write-off) of a debt erases the debt—the first of those two agreements—but does not affect your obligation to surrender the collateral if you don’t pay the debt. So if there is some collateral you want to keep—such as your vehicle—you need to keep paying for it, in spite of your ability to discharge the debt in bankruptcy.
Does Your Vehicle Definitely Secure Your Debt?
Most of the time there is no doubt that your car or truck is legally tied to your debt as its collateral. It’s clear that the creditor has a right to repossess your vehicle if you do not pay. But sometimes, such when you already own a vehicle that you give as security for a personal loan, or when paperwork is not processed correctly, a vehicle which you thought was collateral on a loan is actually not. This is something you and your attorney need to determine early in your case.
If You’re Current or Almost Current on Your Vehicle Loan
To keep your vehicle under Chapter 7, most of the time you must either be current on your vehicle loan or be able to get current within a month or two of filing the case. Otherwise you will not be able to keep your vehicle. Rarely, you may be given more time than that to catch up, or the unpaid payments may even be put at the end of the loan contract. Ask your attorney about your particular lender’s likely requirements.
If you can’t bring your loan current as fast as your lender requires, your better option may be Chapter 13, which usually allows many months to catch up on a vehicle loan, and may give you other significant advantages.
Reaffirming Your Vehicle Loan
So assuming that you are current or can get current quickly on your loan, under Chapter 7 you must usually sign a “reaffirmation agreement” to keep your vehicle. You “reaffirm” your debt in spite of your bankruptcy, saying that you want to exclude your vehicle loan from the discharge of your other debts. You agree to remain liable on this one particular debt in order to keep your car. Reaffirming can also help you get a jump on rebuilding your credit. So reaffirming can often be a very sensible move.
Risk of Future “Deficiency Balance”
The potential disadvantage of reaffirming your vehicle loan is that if you are later unable to keep up the payments you could be liable for a “deficiency balance.” That’s the amount that would still be owed on the loan after the lender would repossess and sell your vehicle, and then apply the sale proceeds to the loan balance.
Whether this problem would ever arise depends on the likelihood that you would not be able to maintain the payments as reaffirmed, and also on how much you owe on the vehicle compared to its value. You should think very carefully about reaffirming a vehicle loan if you do not anticipate having a stable source of income throughout the remaining length of the loan, and/or if the vehicle is worth much less than you owe on it.
In some limited situations you may be permitted to keep your vehicle by just keeping current on your payments without reaffirming the debt. This way, if you miss or are late on a payment the creditor could immediately repossess your vehicle. But you’d not risk owing a future “deficiency balance.” That’s because without a reaffirmation the creditor’s rights are limited to repossession. This option is not likely available with most creditors, so ask your attorney.
Contact the law Office of Andrew B. Finberg
If you live or have a business in New Jersey, we can help you keep your vehicle in bankruptcy. The Law Office of Andrew B. Finberg works with individual consumers and business owners facing all kinds of financial challenges. Please call (856) 988-9055 or use the online contact form to contact your New Jersey bankruptcy attorneys at the Law Office of Andrew B. Finberg, LLC.