Having made the difficult decision to file bankruptcy, many questions remain about how it will affect the property that you are still making payments for, such as your car. In a Chapter 7 Bankruptcy you will need to decide whether you can afford to continue making payments or whether you will surrender the car. Once you have decided you will need to file an official form called the Statement of Intention (SOI) with your bankruptcy papers and mail a separate copy of the SOI to your vehicle lender, that will then either confirm or reject the lease.

Surrendering the car

If you state on your SOI that you reject the lease on your vehicle, you can get out of the lease and are cleared of any further debt obligation to the lender after your bankruptcy discharge. You will then need to find another vehicle to use and hand over the car.

Keeping the car

If you decide to keep your car and have a security in place within 3 years on your vehicle, you must pay the full amount owed or you lose the vehicle. If you are current on your car payments you typically can keep the car if you continue making payments. Sometimes you can ask for a so-called “redemption” procedure. With the redemption process you can make a lump sum payment of the current value of the car or enter into a new contract, a so-called reaffirmation agreement, which lets your keep your car under similar terms as your original car’s promissory note. If the lender has been accepting your payments, the lender will most likely let you retain and make payments for the vehicle without entering into a new reaffirmation agreement (ride-through option).

Details of the Reaffirmation Agreement

Be sure to know what the lender’s requirements are and whether the lender requires a new contract, a reaffirmation agreement that is. Call your lender and explain your situation and your intent to file for bankruptcy. Understand that in the case that you do not need a new reaffirmation agreement, the lender will still have a lien and can repossess the car if you default on your payments. If the lender does require you to reaffirm the promissory note and you agree, the lender will have a right to repossess the car if you default on your payment and you will owe any deficiency that remains on your loan. This is the big difference between not requiring a reaffirmation agreement, where you do not owe a deficiency on the car in the case of repossession.

Carefully consider the advantages and disadvantages of a) keeping your car and b) how you will negotiate the terms with your lender.

If you work with a good bankruptcy attorney, the attorney will go over your options and therefore help you make informed decisions.