What happens to your property when you file for a Chapter 7 bankruptcy? As previously discussed, Chapter 7 bankruptcy is a “liquidation process.” Generally speaking, most of your property is going to be sold to pay off your creditors. This also applies for property in which your creditors have a “secured interest.” A secured interest means that your creditors have a right to reclaim the property itself to satisfy your debt. The most common example of a secured interest is a car loan. If you default on your car loan, your car company has the ability to reposses your vehicle.
However, you may be able to keep your vehicle in a Chapter 7 bankruptcy. This is accomplished through a specific document that is filed with your bankruptcy paperwork. So what are your options?
OPTION ONE: Surrending Your Vehicle
The first, and most common option, is to surrender the vehicle. Many people are unable to afford the car loan. That is the primary reason why people turn to bankruptcy. Bankruptcy will not necessary keep your vehicle either unless you are able to come to an understanding with your car company. Surrendering your vehicle allows you to speed along the process and begin your fresh start much sooner. However, this option is not ideal if you need your vehicle.
OPTION TWO: Re-executing Your Car Loan
The second option is to agree to be bound by your car loan even after the bankruptcy is over. This is a good option if your vehicle is not exempt under the bankruptcy laws and you still need your vehicle. By re-executing your car loan, you are agreeing to be personally liable for the loan even after the bankruptcy is over.
However, you are not necessarily required to keep the same terms of your previous loan. During the bankruptcy process, you can negotiate with your lender to secure more favorable terms.
OPTION THREE: Informal Agreement to Pay
Some creditors may be willing to work out an agreement whereby you keep the vehicle and do not have a written contract for the loan. This option is a good idea if you want to avoid personal liability for the loan going forward, and want to keep using the vehicle. However, there are several downsides to keeping the property without reaffirming your debt. This option can harm your credit rating and make future loans harder to obtain.
OPTION FOUR: Paying off the Car Loan
The final option that is available to you is to pay off the remaining balance of your car loan. This option has been previously discussed in a separate article. This allows you to keep the vehicle and to improve your credit score. However, many find it difficult to come up with the extra money to pay for the property.
Why You Need a Lawyer
Given the number of options available and the consequences of each option, it is important that you discuss your bankruptcy options with a local lawyer. The lawyer can advise you as to which of these options are best for you, and how you can maximize the fresh start that you are obtaining from a bankruptcy. Given the complexity of bankruptcy, it is essential that you seek help from a lawyer prior to filing or negotiating with your creditors. There are also several deadlines in which you have to file this paperwork with the court. Failure to file the appropriate paperwork with the court may result in the seizure of your property.