Car is no longer a luxury for an American; it has become a necessity for his survival.
Don’t worry about your car, when you file for Chapter 7 bankruptcy. You can keep using your car during bankruptcy. You just have to inform the bankruptcy court about your decision by filling an official document called Statement of Intention (SOI).
Why is it important to take a quick decision about your car?
When a person files for bankruptcy, the “Automatic Stay” prevents creditors from repossessing your assets. But, the stay is not absolute. The lender can ask the bankruptcy court to remove the stay and repossess your car. So, it is important that you take care of your car before filing for bankruptcy.
If you want to keep your car during Chapter 7 bankruptcy and don’t want it to repossess, you have two other options:
1. You can opt for Redemption and pay a lump sum amount to the lender. The amount will be equal to the current value of the car.
- If you have money to cover the current value of your car, you can opt for redemption and buy the car disregarding the total loan balance. For example, your total loan amount may be $15,000 but if the car’s current value is just $10,000, you will have to pay $10,000 only.
2. You can enter into a contract with your lender and continue to make payments as if you did not file for bankruptcy. It is called Reaffirmation.
- Now, most people who file for bankruptcy don’t want to part with a large amount of money. So, redemption is a less popular choice. If you want to keep using your car during bankruptcy, you can choose reaffirmation and continue making smaller payments to the lender in comparison to making a lump sum payment.
Why should you choose Car Loan Reaffirmation?
• Impossible to get loan approval in Bankruptcy
Lenders don’t provide car loan approval to people in bankruptcy. Also, it becomes very difficult for people with a history of recent bankruptcy to obtain a loan. So, it is wise to stick to your current loan program.
• Higher interest rates after bankruptcy
Even if you manage to get approval after discharging bankruptcy, the interest rates are exceptionally high on post-bankruptcy auto loans. It is extremely risky to obtain a loan with exorbitant rates because it will impair your credit score.
• Upper hand in the negotiation process
If you let the car repossess, lender will have to carry out a lot of processes to recover money. He/she will have to sell the car at an auction and accept whatever money he/she receives. So, it is in his/her interest that you keep making payments. You can take advantage of this situation and obtain lower rates on your auto loan.
So, now that you know all about car loan reaffirmation, do not worry about your car during bankruptcy.