This is going to be a long one. Beautiful morning here in San Jose and you’re going to ask me about redemptions and reaffirmations? Well, here goes. People facing a Chapter 7 or Chapter 13 bankruptcy are often looking for solutions regarding their car loan. Keeping your car is one of the top priorities for people facing bankruptcy, especially here in the San Jose area, where a car is an absolute necessity. There are many issues that arise with regard to your vehicle and what the options you have.
I’m going give you a 30,000 foot view here so don’t go calling the California Bar Association claiming this is legal advice. It’s not. But hopefully it helps you understand your options as you think about this process. The first option you have is to keep your car and continuing to make the payments. This is often what people choose to do. They have the car, they like the car and want to keep the car.
Whether or not this is a good idea completely depends upon your own personal situation. Some people owe $2,000 on a car that is worth $4,500. They have six payments left and are current with their payments as they head into bankruptcy. It is probably in this persons’ best interest to continue making the payments and get the pink slip shortly after the bankruptcy.
For others, this may not be the situation they are facing. It could be quite the opposite. In fact, most of the people I have met in my legal career have been in a situation where they owe closer to $20,000 on a car with a 17% interest rate. The car’s value tends to be closer to $10,000 or $12,000. At this point, you owe way more on the car than it is worth with an interest rate that is just not very kind. Keeping a car in this situation may be trickier.
Also, we’ll need to talk about whether or not to reaffirm the car. Signing a reaffirmation agreement can be very dangerous. So we’ve got a couple of layers here. The first decision is whether to keep this particular car. The second question is whether to sign a reaffirmation agreement.
Once you file bankruptcy, you will have a couple of months to figure this out if Chapter 7 Bankruptcy is the path you choose. You can go to some local car dealers and see if you can find a better deal. You can call your current car company and see if they’ll negotiate principal or interest rates.
This information can help you determine which path you are going to go down. Some more factors weigh into this. While keeping your car may be one of the most critical aspects to your bankruptcy, there are some other forces that may be important to consider.
One factor that often really matters to people is their credit score. People want their credit scores to go up. People want that fresh start. But if you keep your current car and continue to make payments, some creditors will not report those payments on your credit unless you reaffirm the debt.
So,one plus to reaffirmation may be that your payments to this creditor get reported on your credit, which helps. But you must understand the huge downside to a reaffirmation before signing one.
When you sign a reaffirmation agreement, you are liable for the debt through your bankruptcy. What this means is that if you owe $20,000 on a car that is worth $12,000 and you reaffirm that debt, then you have serious concerns if something ever goes wrong with that plan. Should be unable to pay off that loan, they are going to be able to repossess the car, same as before the bankruptcy. They will then sell that car for its’ current market value and bill you for the difference.
And they will legally have the right to do so because of the reaffirmation agreement. Dangerous. This is why some people decide to continue to make payments on their car and not reaffirm the debt. This is a decent option, because the car companies (not Ford Motor Credit) often allow you to retain possession of the car so long as the payments are made. This way, you keep the car and you do not run the risk of having a deficiency balance should something go wrong with the car.
The downside to this option is that the creditor is likely to not report your payments on your credit report. This is a difficult decision that people are forced to make and it can really be tough to make.
Other people decide they are not going to reaffirm the debt nor are they going to retain and pay on their current loan. They decide it’s time to get a new car. They go to a dealer and apply for financing. Many people find this to be amazing. But creditors are often willing to work with people who have filed a Chapter 7 bankruptcy. If you can show an ability to pay, then you’ll have little debt and they know you can’t file bankruptcy again for awhile.
Now, this is a long explanation here, so do remember this; most of these options we’ve discussed here are for people in Chapter 7. Chapter 13 gives you a bunch of different options, but we’ll get to that in a bit.
There is another choice I want you to know about in a Chapter 7. It is called redemption. This gives you the chance to basically purchase the car for the value of the property. Say, for instance, we’ve got that car discussed above; worth $12,000 and you owe $20,000. You can file a motion with the bankruptcy court to pay the creditor $12,000 and then you get the car.
This can generally happen through a couple of different ways. You can find a way to put together $12,000 and pay right out. Other people have found companies who will finance them this amount, again at difficult interest rates.
I have found the best way to use redemption is generally when the car is worth less than $3,000 and you can scrape together the money to buy it outright. This is very very important for people who have title loans with these interest rates at 136%.
You can get the pink slip back and cut the interest these crooks are charging you. In this regard, redemption can be a secret weapon against these horrific loans people are forced to take out.
You are going to have some choices regarding your car depending upon the specific facts of your case. Depending on those facts, you may be looking at letting your current car go and finding a new loan.
Getting a new car can give you a fresh start. It can also help you rebuild your credit quickly. The interest rate may not be kind. It really will depend on your situation.
A new car? Reaffirm? Retain and Pay? Redemption? These options must be weighed carefully. Your choice could literally mean tens of thousands of dollars in savings or in costs. A good attorney is needed to help guide you through this process.
You probably get the feeling, if you’ve read any of my website, that I am opposed to bankruptcy attorneys offering to provide you with the legal service you need to maximize this process.
Get in touch.