Repairing Your Financial Situation

Posted on: 2 February 2016

A lot of people who are struggling financially find themselves faced with a car payment that's unmanageable. Worse, they are often "upside down" in the vehicle, owing far more than the vehicle is actually worth. What are your options for dealing with a vehicle like this under bankruptcy laws?

Option 1: Surrender

While it might not be your first choice, surrendering the vehicle is the easiest option. You can return the vehicle directly to the lender and discharge the remaining debt through your bankruptcy. Lenders typically sell vehicles they reclaim at an auction and then issue a "deficiency judgement." In order to avoid being stuck with that judgement, you want to make sure that you return the vehicle prior to your bankruptcy discharge and get a receipt (for proof, should it ever come into question).

Option 2: Reaffirmation

If you want to keep your vehicle, reaffirmation is a possibility. Some debtors, once they are freed up from their other obligations, find the payments more manageable. Your lender may require you to sign a new agreement that officially reaffirms your commitment to paying the debt. There is a risk to this, however. If you fall behind in the future, the lender can repossess the car and sell it, then get a deficiency judgement against you that wouldn't be dischargeable. The terms are also likely to be a disadvantage to you, also, especially if you owe more than the vehicle is worth. The lender is under no obligation to reduce the payments or the overall debt.

Option 3: Redemption

You can ask the court to allow you to pay off the vehicle. The court will determine the vehicle's actual worth (which is usually far less than you owe) and order the lender to accept that amount as full payment of your debt. You usually have two choices–you may be able to pull together enough money through friends, relatives, or your regular income to pay the loan outright, or you can try to get a redemption loan with another lender. There are some lenders who specifically deal in these types of loans. This solution has the same potential problem that reaffirmation does, in that you can end up losing the car in the future and being stuck with the debt if you fall behind on the payment. However, since the payments on the new loan are usually lower, it's less likely to happen.

Option 4: Direct Negotiation

You can also try to negotiate directly with the lender. A few lenders are willing to lower the debt to the fair market value, especially if you have a long-standing relationship with them. You're probably going to be most successful if the lender is your own bank or credit union and you've been regular on the payments. You may be able to get your bank or credit union to both reduce the payments or total owed on the vehicle and allow you reaffirm.

Deciding what to do about your vehicle is probably one of the more complicated issues you'll face in your bankruptcy. Talk to your bankruptcy lawyer about your available options and listen carefully to his or her advice. You don't want to make a move now that you'll end up regretting later.