Your Vehicles in Chapter 7

A question I often hear as an Austin bankruptcy attorney is this: “ What should I do about my car and its loan? I need a vehicle to commute to my job.” Almost always my clients will have zero or negative equity in their vehicles.

There are three choices:

1. You can choose to “reaffirm” the debt on the vehicle and keep making the payments, assuming you can afford to do so. If you can’t honor this agreement and fail to make payments as agreed, you will be subject after your bankruptcy to having that car repossessed. If you’re driving something beyond your means that is likely to have high maintenance and operating costs, say an out-of-warranty BMW, you should be cautious about reaffirming.

2. You can discharge your current loan, surrender the vehicle and then replace it with the help of a lender or dealer that specializes in credit challenged situations. You will pay a significantly higher interest rate than someone with unblemished credit, but you may be able to reduce your monthly payments by taking the opportunity to trade down to a more affordable vehicle. I refer my clients to a couple of local dealers who provide this service, and you can find relevant online lending resources at Fresh Start Loan Corporation and US Bank.

3. There is also the option of what is called 722 Redemption. The aforementioned online lenders also provide financing for this method of retaining your vehicle. This section of the bankruptcy code allows you to redeem “tangible personal property intended primarily for personal, family, or household use” from a secured lender by paying off that loan at the “replacement” value of the property. This is most often applied in the case of vehicles. So, for example, if you have a 2010 Dodge Ram Laramie truck on which you owe $28,000 and the current retail market value per a source like Manheim Market Reports is $23,000 based on its mileage and condition “as is,” you can pay off the current lender for $23,000 with a new loan. You get to keep your favorite truck, and the reduction in the loan amount even with a higher interest rate may lower your monthly payments enough to make a difference going forward. And, this new loan starts credit reporting that begins to help you rebuild your credit score. As your bankruptcy lawyer, I file a 722 redemption motion with the court, and upon approval the original secured lender has to take the lower amount as full payoff and to release the lien in favor of the new lender.

This is one of the many choices you will get to make during a Chapter 7 bankruptcy filing. It affects both your mobility and your attainment over time of a decent credit score. You may have to suffer through a 20%+ interest rate until you are re-established and can pay off this 722 redemption loan, but I’ll help you evaluate your alternatives. At least you have some viable options for us to consider.