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Dealing With Vehicles in Chapter 7

     When we file chapter 7 bankruptcy we always think how it effects our assets, like house or a car. Our vehicle is very important. It is needed to get to work, go to the grocery store and to do just about anything that we need to do. Sometimes when clients file bankruptcy the client just wants to be done with the vehicle; it is often in poor condition, with high mileage and subject to more debt that it is worth. Those cases are relatively simple. If you file a bankruptcy and don’t want your car you have the option to surrender it.

     In most cases in bankruptcy the client wants to keep the car and is willing to continue making the payments to the lender. The first thing to look at is the whether there is any value in the vehicle over and above the amount of the car loan. If there is no value or we can use the clients exemptions to protect that value the bankruptcy estate will have no interest in selling the car and the likely result as far as the bankruptcy trustee is concerned is that the car will pass through the bankruptcy. In that case the client will be probably able to keep it so long as he is current and maintains the payments on that vehicle.

     When dealing with car lenders there are three official ways to deal with a vehicle in Chapter 7. First, you can surrender a vehicle that you do not want. Second you can enter into a reaffirmation agreement making yourself completely responsible for that debt after the bankruptcy, meaning if you miss a payment and they repossess the car they will come after you for a balance. Third you can redeem the car with a court order lowering what you have to pay for the car to its actual value.  The problem with this option is that you have to pay the value in a lump sum and who has several thousand dollars available to do this.

     Each of these options has problems. With a reaffirmation you don’t get rid of the debt. With a reaffirmation you also often end up owing more on the car than it is worth. The court will sometimes enter an order disapproving the reaffirmation but directing the lender not to repossess the car so long as it remains current. There is no guaranty the court will enter this order however and you will have to attend an additional hearing to get it. With redemption you have to be able to pay the full retail value of the vehicle when the redemption order is entered. Most clients cannot afford to do this.  While there are a few lenders who will help you redeem a vehicle the interest rate is often high enough to make the effort questionable.

     There is an unofficial alternative. So long as the client is current and continues to make her payments on time, very few car lenders will repossess a vehicle. The benefit of this approach is that one can keep the car and later should it break or become a liability the client can simply voluntarily return the vehicle and in the absence of a reaffirmation have no liability for a balance. The number of car companies allowing this treatment changes and it is important to get good advice from a Maryland Bankruptcy Attorney before making any of these decisions.

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