Using Automotive Bankruptcy Agreements
In both Chapter 7 and Chapter 13 cases, individuals may keep their car. In Chapter 13 cases, past due payments are rolled into the plan without the necessity of creditor approval. In Chapter 7 cases, individuals are faced with somewhat more challenging options relating to automotive bankruptcy. In Chapter 7, individuals may choose one of either two options:
- Reaffirmation agreements - generally require full payment of arranges and debtors must agree, in writing, that the underlying debt remains in full force and effect and is not affected by subsequent general discharge of scheduled debts.
- Redemption agreements - require the full payment of the secured portion of the debt to release collateral from liens. The remain unsecured portion, if any, may be discharged.
Court approval is necessary for a reaffirmation agreement, yet is rarely denied because of the uncontested nature of the agreement between debtor and secured creditor. For redemption, because the secured portion is paid fully, creditor rights under security agreements are exhausted and the remaining balance, if any, is treated the same way as other unsecured claims.
Which option is better?
When the remaining balance is small, redemption is far more preferable than reaffirmation and prevents later repossession. When the balance on a secured car loan is simply too large to repay, reaffirmation agreements almost always extend the loan upon the same rates and terms as existed before filing. In essence, debtors are provided the option of removing a car loan from contest by requesting reaffirmation. Most creditors prefer reaffirmation over repossession which results in the discharge of all amounts owed.
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