What to do with a car in Chapter 7 Bankruptcy

Can your car "ride through" during a bankruptcy?

The prospect of filing a bankruptcy is never pleasant. For a borrower, reaching the point where your debts are simply too much to handle can feel like defeat. Too often, these debts have grown to an overwhelming level because of misfortune. You may have lost a job or suffered a sharp loss in hours.

For others, it is a medical problem, caused by an illness, medical condition or accident. It becomes a dual calamity by both generating large medical bills and by often leaving you unable to work and without income.

Still others may have been involved in a divorce and the combination of dividing limited assets between two households and dealing with all of the additional expenses that accompany the life after a divorce can push your finances over the edge into default and bankruptcy.

Chapter 7 stops the unending collection calls

You decide to file a Chapter 7 bankruptcy. It will stop the collection calls and letters and once you receive your discharge, it will eliminate many of those unsecured debts, like credit cards and medical bills from doctors and hospitals. However, you may worry, and wonder what should you do with your car?

If you are like most people in Everett, or almost anywhere in Washington for that matter, you need a car to get to and from work. There may be some locations in Seattle where you can manage without a car, but for most people, to maintain a job, having a car is essential.

You may even have struggled and scrimped during your financial distress to keep your payments current on your vehicle, as you could not afford to have it repossessed by your lender.

Now, in bankruptcy, you hear you either have to redeem, surrender or reaffirm your car. The first option requires that you pay off the loan in full. You sigh; if you could pay your car loan off in full, you wouldn't be in bankruptcy.

The second option is not attractive, as you need your vehicle for work, so returning it to the creditor is not possible.

So should you reaffirm? This is a difficult decision. If you are current and your vehicle is almost paid off, it may make sense to reaffirm, as you are likely to be able to complete making your payments and obtain the title to the vehicle free and clear.

But if the vehicle is worth far less than the loan, as often happens with rapidly depreciating motor vehicles, and you reaffirm the debt, you become fully obligated for the balance of the loan after your bankruptcy discharge. This means your lender could repossess the vehicle after the bankruptcy if you fell behind on your payments and then begin collection efforts on the remaining deficiency balance.

Ride through?

At one time, the bankruptcy courts in the Washington and the Ninth Circuit permitted a debtor who was current on their loan to retain the vehicle and not reaffirm. They would keep making payments, but the debt would have been discharged by the bankruptcy and if they lost the vehicle and had a deficiency balance, it would be uncollectable.

One case in the Ninth Circuit has closed this opportunity for a debtor who does not submit a reaffirmation agreement. Some courts have allowed what has been called a "backdoor ride through," where the debtor submits a reaffirmation agreement, but their attorney does not sign it, as the attorney often finds it could create an undue hardship on the debtor.

The bankruptcy court must then hold a hearing to evaluate the reaffirmation agreement, and if the court does not approve the agreement, it is possible that debtor could keep the vehicle as long as they remained current on their payments and maintained insurance on the vehicle.

The state of the law is unclear on this issue in the Ninth Circuit and some lenders may insist on a reaffirmation while other lenders may be willing to allow such a state of affairs, as the costs of repossessing and selling the vehicle guarantees they will suffer a loss on the transaction.

The facts for every borrower and every bankruptcy are different and you should discuss all of your options with your attorney before making any decision with regard to your vehicle.