What Happens When You Reaffirm a Vehicle After Bankruptcy?

By Heather Frances J.D.

Bankruptcy allows you to get a fresh start financially, clearing up debts by paying some and dismissing others. Filing Chapter 7 bankruptcy, also called "liquidation" bankruptcy, doesn’t mean you have to give up everything you own, even if you still owe money on some of your assets. If you reaffirm your obligation to pay for an asset, such as a vehicle, you can keep that asset. However, without reaffirmation, you could lose your vehicle after your bankruptcy proceedings if you still owe money on a car loan.

Bankruptcy allows you to get a fresh start financially, clearing up debts by paying some and dismissing others. Filing Chapter 7 bankruptcy, also called "liquidation" bankruptcy, doesn’t mean you have to give up everything you own, even if you still owe money on some of your assets. If you reaffirm your obligation to pay for an asset, such as a vehicle, you can keep that asset. However, without reaffirmation, you could lose your vehicle after your bankruptcy proceedings if you still owe money on a car loan.

Chapter 7

In Chapter 7 bankruptcy, your nonexempt assets will be taken by a bankruptcy trustee and sold to pay your debts. However, secured property, which is property that is collateral for a loan, and unsecured property, which is not the basis for a loan, are treated differently since the loan for secured property must be repaid first from the sale of the property. Excess proceeds from the liquidation are divided among your remaining creditors. Exemptions allow you to keep some property, such as family keepsakes and household goods.

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Surrender

A Chapter 7 filer may choose to surrender secured property during the bankruptcy proceeding rather than continue to make payments. If your vehicle isn’t paid off, you can surrender the vehicle and have any remaining debt discharged during your bankruptcy. For example, if your car is worth $6,000 but you owe $7,000 on the loan, you can surrender it and allow it to be sold. The remaining $1,000 in unpaid car loan can be discharged – or dismissed – and you won’t have to pay it.

Reaffirmation

If you’d like to keep your car rather than erasing the debt on it, you may have the option to reaffirm the car loan. Reaffirmation creates a continuing legal obligation to make payments on your vehicle until it’s paid off, but it also enables you to keep the vehicle. This effectively takes the vehicle out of the bankruptcy process since it is not being sold by the trustee, nor is the debt being discharged. However, if you reaffirm a debt and later can’t make the payments, you generally can’t file Chapter 7 again to obtain a discharge of that debt for at least eight years.

Rescinding a Reaffirmation

If you reaffirm your vehicle loan but later change your mind, you may be able to rescind – or take back – your reaffirmation. However, you must rescind prior to the time when your Chapter 7 discharge is entered by the court or within 60 days after you file the reaffirmation with the court. Rescission is only effective if you mail a written rescission notice to the creditor.

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Can I Convert to a Chapter 7 Without Losing My House or Car?

References

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New York Bankruptcy Automobile Surrender Laws

Under federal bankruptcy law, a debtor may file for protection from creditors while a court oversees his financial affairs. In Chapter 7 bankruptcy, the debtor surrenders non-exempt property, which a court trustee then turns over for the repayment of debts. A Chapter 13 bankruptcy sets up a partial repayment schedule. State laws control certain issues in bankruptcy, including property that is exempt from seizure. The New York exemption schedule protects some equity in a car, but a debtor may still have to surrender it.

Three Options to Protect Your Car in a Bankruptcy

If you're facing Chapter 7 bankruptcy, you may lose your car. However, depending on where you live and your personal circumstances, you may be able to keep your car even if you file Chapter 7. In other instances, filing Chapter 13 may be a better option if you want to keep your car.

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