In today's difficult economy, used car prices are dropping like stones. That's leaving a lot of people "upside down" in their vehicles; in other words, they owe more than the car is actually worth. In a Chapter 7 bankruptcy, you have basically three options in this situation: reaffirmation, redemption, and surrender.
REAFFIRMATION
Reaffirmation is a procedure by which you agree to pay a debt, in this case a car loan, which would otherwise be discharged in bankruptcy. Reaffirming your vehicle loan is generally a bad idea when the car is worth less than you owe on it. You have to keep current on payments and sign an agreement with the lender that you wish to "reaffirm" the loan you already have with them. Same bad terms, same bad deal, especially if you're agreeing to fulfill the balance of a $10,000.00 loan for a car that's only worth $5,000.00. Plus, the bankruptcy court has to approve this reaffirmation agreement. For this to happen, you must show the Court that the payments won't be an "undue hardship" on you. That may not be as easy as it sounds. But let's assume the Court approves the reaffirmation. If you later default on the loan, the lender will repossess the vehicle and you will owe the difference between what they sell the car for and what you owe them under the terms of your loan agreement. You could end up with no car and a bill for thousands of dollars from the lender.
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REDEMPTION
A better bet might be redemption. If your loan balance is $10,000.00, but your car's market value is only $5,000.00, you can redeem your vehicle in a Chapter 7 bankruptcy for what it is actually worth, $5,000.00. You get to keep the car and you owe nothing to the loan company beyond the $5,000.00. So where do you come up with the money to take advantage of vehicle redemption? Friends or relatives who are willing to loan you the money are one option. But make sure the loan is made after the bankruptcy filing, or it will have to be listed on the bankruptcy petition. If you need help formalizing the loan, sites like VirginMoney.com will draft and even manage loans between friends and family for a reasonable fee.
No magnanimous friends or family who are flush with cash? There is another possible solution to this dilemma. Redemption funding companies are springing up all over the place to lend you money to redeem your vehicle in bankruptcy. You could end up owing less on the vehicle, paying lower monthly payments, and still keeping your car. Be careful, though - some of these lenders are predatory. You could conceivably end up in a worse deal than the one you started with. So read the redemption loan contract closely before you sign. Pay special attention to the loan terms and to any fees that are being charged. If you have an attorney, ask if he or she can recommend a reputable redemption funding company for you to work with.
SURRENDER
Your last option is to surrender the vehicle to the bankruptcy trustee. You would lose the vehicle, but you also get to discharge any potential shortfall between what the lender can sell the car for and what you owe them. The loan contract is extinguished, and you can just "walk away". If your car is very expensive and you really can't afford it, this may be the smartest thing you can do. The same reasoning holds true if your car is in bad shape and needs a lot of costly repairs. Keep in mind that there are lenders out there who will work with people right out of bankruptcy to finance the purchase of a more affordable, and more reliable car.
Though these are your three main options for handling an "upside down" car loan in a Chapter 7 bankruptcy, check with an experienced bankruptcy attorney before making any decisions. There may be alternatives (like a Chapter 13 bankruptcy, for example) that better suit your needs.
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