As an Arizona bankruptcy lawyer, one of the most frequent questions I get from clients is whether they can keep their car in a Chapter 7 bankruptcy. The answer is yes. One great advantage in a Chapter 7 is that a debtor can pay off any secured personal property loan for an amount equal to the current retail value of the secured property in lieu of paying off the entire debt. This become advantageous when the property is worth much less than what is owed. This is called redemption, and its most frequent application is with respect to vehicle loans.
For example, if Kelley Blue Book says your vehicle’s retail value is $7,000, but your loan balance at the time of filing Chapter 7 is $15,000, you can pay off the vehicle for $7,000. Once you pay such amount, the vehicle lender must release its lien on your vehicle.
Unfortunately, redeeming a vehicle loan is impractical for most Chapter 7 debtors. A debtor must pay the entire redemption amount within 45 – 60 days after filing bankruptcy, and the amount must be paid in a lump sum. Most Chapter 7 debtors do not have that kind of money. Furthermore, the debtor can’t save this money prior to filing bankruptcy because money a debtor possesses as of the bankruptcy filing date will have to be surrendered to the bankruptcy trustee. It’s a catch-22.
One solution may be to borrow the money necessary to redeem the loan. Ideally, a parent or friend would lend the money to the debtor on favorable terms. Another solution is to borrow the money from the debtor’s 401(k) or IRA. A debtor could go to a lender that specializes in redemption loans, but it has been my experience that such lenders frequently charge a high interest rate, causing the debtor to pay more money in the long run.
Because redeeming a vehicle loan is not a practical solution for most debtors, an Arizona bankruptcy attorney will probably recommend that the debtor reaffirm the loan if the debtor desires to keep the vehicle and if the vehicle payments are still affordable to the debtor. For more information about reaffirmation agreements, click here.