WHAT HAPPENS TO MY CAR LOAN OR OTHER SECURED DEBT WHEN I FILE FOR BANKRUPTCY?
Posted on 02 18,2015
In bankruptcy, there are two categories of debts, secured and unsecured. Secured debts are debts against something that you own, such as a financing contract, a mortgage, or a title loan. If your vehicle is secured by a debt, you have a choice when you file for bankruptcy; you can choose to keep your vehicle if you are willing to pay for it, or you can use the bankruptcy to walk away from a vehicle you no longer want to pay for, and get the debt wiped out. You get this choice for each of the secured debts you have.
In a Chapter 7, you have several options for keeping the vehicle or other items you are financing. You can reaffirm the debt, which means that you agree to be responsible for the loan despite filing for bankruptcy. The creditor will give you a reaffirmation contract to sign and it is filed with the court. You should consider carefully whether you are able to continue to make the payments because you are agreeing that this debt will not be discharged and you will be responsible for it just as if you had not filed bankruptcy. You can redeem the debt, which means that you pay the creditor all at once the lesser of the balance of the loan or the market value of the item. Or if is a mortgage on a house, you have the additional option to continue to make the payments without having to reaffirm. This means you get the benefit of keeping the home without reassuming personal liability on the mortgage. If the home is ever foreclosed, you will not be responsible for the deficiency balance because you will be protected by your discharge.
In a Chapter 13 repayment bankruptcy, you can continue to directly make your payments on the loan outside of the repayment plan, or it can be included as part of your monthly payment made through the courts. The advantage of including your vehicle or other secured debt in the plan is that it will allow you to restructure your loan, including: not having to catch up arrears, stretching out payments over more time, lowering the interest rate to just above prime (currently, that means interest rates of 4.25), and, if the loan is old enough, reducing the balance to market value, called a "cramdown." Vehicles are eligible for a cramdown after 910 days from when you took out the loan, which is roughly two and a half years. Other items you are financing can be crammed down after only a year from purchase. In this way a Chapter 13 can save you a lot of money on these debts. The only secured debt that cannot be restructured is the mortgage on your home.
If you choose to walk away from any of the debts instead, you surrender the collateral to the lender after the Trustee meeting. Typically, you contact them and work out mutually agreeable arrangements for picking up or dropping off the items. Any remaining debt is wiped out by your bankruptcy discharge.
We recommend you consider carefully whether each secured debt is worthwhile and affordable when filing bankruptcy, and to consult with our experienced attorneys about your options.
If you have further questions or concerns, contact David McCormick Law Group to schedule a free consultation!