What happens to your car loan after bankruptcy? That is one of the biggest questions facing people when they consider filing for bankruptcy.
The advantage of bankruptcy is that it provides a way to get rid of debt when you can no longer pay for it. The disadvantage is that sometimes you need to keep some of those debts so that you can get yourself back on your feet. When it comes to a car loan and bankruptcy a debtor has four choices, each with its own pros and cons. You can discharge, redeem, reaffirm or “ride-through” with the debt.
Discharging Your Car Loan
The first and easiest choice is that the debtor can just include the car loan in the list of creditors and elect to surrender the vehicle. When the bankruptcy is declared the debtor will simply return the vehicle, the debt will be discharged and all parties go their separate ways. The advantage of this choice is that the debt is gone; there is no longer a potentially onerous monthly payment for the debtor to pay. The disadvantage is equally obvious. The debtor does not get to keep their car. If they need a car to get to work or pick their kids up from school they need to find another plan.
Reaffirmation of Your Car Loan
A debtor may choose to reaffirm the car loan after bankruptcy, which allows them to keep their vehicle as long as they pay any back debt and continue to make their car payments. In this case by keeping their vehicle the debtor may have an easier time finding or keeping work. However, car payments can be expensive. In fact an expensive car payment may be one of the reasons that the debtor found themselves declaring bankruptcy in the first place. Also, by reaffirming the debt the debtor has lost the right to discharge it in bankruptcy. If they reaffirm the debt and then fall behind on their payments they may find themselves facing collectors and possible repossession, the very problems that bankruptcy was supposed to stop in the first place. Because of this a debtor needs to consider very carefully whether to reaffirm a debt. If the payments are really high, the judge may not even let the debtor keep the payment.
Reaffirmation should usually only be used if the payments are low and there are not many left before the car is paid off. Otherwise it is usually better to give the car back and try to get a different car after the bankruptcy.
“Ride Through” With Your Debt
The third option is a kind of middle ground. It is called a ride through. If the debtor has kept up with his car payments while going through the bankruptcy process they may choose to simply keep paying. This process is not very popular with the creditors, but it certainly can be achieved over the creditor’s objection. If you can ride through with your debt you do not end up with the new contract like you would in a reaffirmation. Therefore if you fall behind you can give the car back and not face the same obligations.
Redemption of Your Car Loan
The final option is redemption. Redemption is great in theory but can be difficult in practice. Essentially, redemption means you simply pay off the car in its entirety. Most debtors cannot do that though. If they could pay off their vehicle they probably would not need bankruptcy in the first place. Sometimes a bank may be flexible about the final payment. It could be that the car is worth substantially less than the balance of the loan. In that case the bankruptcy trustee could argue that you should pay less. The bank may even agree if they figure that taking the car back and trying to resell it is too big of a hassle.
The Two Most Common Choices
Although there are three basic ways to deal with your vehicle during a bankruptcy (or what happens to your car loan after filing bankruptcy), ultimately, the best choice depends upon your particular circumstances.
Most often, if you desire to keep the car loan after declaring bankruptcy and can maintain the monthly payments, then a ride-through would be your best strategy.
If you cannot afford the monthly payments, the bankruptcy attorneys at Albuquerque Business Law can help you try to negotiate for more favorable terms as part of a reaffirmation, but in most circumstances it is better to just give the car back if it is unaffordable. Bankruptcy is a great way to get a fresh start.