If you owe money on your car when you file Chapter 7 bankruptcy, you have three choices with regard to your car loan. You can choose to surrender the car, which means you will not have to repay the debt in exchange for giving up the car; you can choose to reaffirm the car loan debt, which means you will keep the car and agree to repay the loan as if you had not filed bankruptcy; or you can choose to redeem the car.
Read on to learn about this third option -- redemption. (To learn about surrender and reaffirmation, see Your Car in Chapter 7 Bankruptcy.)
Redemption is not as common as reaffirmation or surrender. If you choose to redeem your car loan, you can keep your car, but you must pay the lender the current value of the vehicle, all in one lump sum. To successfully redeem your vehicle, you must:
What is the value of your car? Value for redemption purposes will depend on what your lender will accept, but the legal standard is that you must pay retail value -- that is, the amount a merchant (such as a dealership) would charge for that same vehicle, given its age and condition. To prove value, you can look to vehicle valuation guides such as the Kelley Blue Book, the Black Book, or the NADA Guide. These guides provide the values for vehicles based on make, model and year, as well as condition. These guides' result are generally accepted as sufficient evidence of value, but if you disagree with the creditor about the car's condition, you may run into trouble. You can also obtain an appraisal, which can be expensive but which holds more evidentiary weight.
Once you and the creditor agree on the car's value or the court decides the value of the car, you must come up with the money to pay the full value in one payment. Once the court enters your discharge at the end of your Chapter 7, the creditor must release its lien, and you will own the car free and clear.
Example. Ted files Chapter 7 bankruptcy. He owes $10,000 on his car, but he knows it's worth far less. The Kelley Blue Book lists the retail value of the car at $6,000. Ted indicates in his bankruptcy paperwork that he intends to redeem the vehicle and offers the lender $6,000 for the car. The lender argues that the car is in better condition than Ted says, and they go to court. The judge hears testimony about the condition of the car and decides that the retail value is $7,000. Ted pays $7,000 to the creditor and is able to keep his car. The lender calls the debt paid in full and gives Ted clear title.
Redeeming your car has the benefit of providing you with transportation without a car payment. You also spend less on the vehicle overall. Although you have to pay a large sum up front, you pay far less than you would have if you had continued to make payments on the vehicle for the original loan term.
Redemption can be difficult, however, because you will have to come up with the lump sum of cash to pay the creditor. Additionally, agreeing on a valuation with the creditor is not always simple or quick, and you may have to go to court, which could end up costing you extra attorney fees.