If I am considering filing a Chapter 7 bankruptcy shouldI stop paying on an auto loan?

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If I am considering filing a Chapter 7 bankruptcy shouldI stop paying on an auto loan?

Asked on February 9, 2011 under Bankruptcy Law, Ohio

Answers:

M.D., Member, California and New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

In a Chapter 7 bankruptcy a debtor has 3 options regarding a car loan:

1. Surrender.  You can contact the lender and turn in your car.  Once you "surrender" the vehicle, your lender will sell it.  If it is sold for less than the amount that you owe, the remaining balance is called a "deficiency".  It should be eliminated in your bankruptcy.

2. Reaffirm.  You typically have the choice to "reaffirm" your current car loan.  Reaffirming a loan means that if you fail to make payments after your bankruptcy is closed, if your lender repossesses your car, you can be sued for the deficiency balance.  However, to keep receiving statements and balance updates, you must reaffirm the debt.

3. Redeem.  The bankruptcy code permits an owner to reduce the current car balance to the fair market value.  So, for example, if you owe $16,000 and the car is worth only $9,000, then you may be eligible to reduce the car balance by $7,000 with a new, post-bankruptcy loan.  This is known as "redemption".  As a general rule, you must own the car for at least 910 days before your bankruptcy filing in order to qualify for a car redemption loan.

You may want to consult further consult with a bankruptcy attorney in your area.


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