If you have a car loan at the time you file for Chapter 7 bankruptcy, you have three options for dealing with it. You can “reaffirm” the debt, return the car, or redeem your car loan. Here’s a quick review of each option.
Reaffirm the debt. This means you agree to continue making payments on your existing car loan. If you can afford this choice, it may help you rebuild your credit after bankruptcy. But don’t reaffirm unless you’re confident you can follow through. If you don’t make your payments as agreed, the lender most likely repossess your car. The bankruptcy court will allow you to reaffirm your car loan only if you show that you can afford the ongoing payments.
Return the car. If you need a car to get back on track financially—for example, if you can’t get to work without it—giving back the car is probably not your best option. But if you can let go of the car you have and pay cash for a cheaper car that can get you around for now, it could be the way to go.
Redeem the car loan. When you redeem a car loan in bankruptcy, you keep the car by immediately paying the lender the current replacement value of the car or the full balance of the loan, whichever is lower. If the value of your car has depreciated faster than your loan balance, this could be a good solution for you. That said, coming up with the full replacement value in cash may seem impossible. Here are a couple possible sources of support:
- Consider whether you can ask a family member or friend to help you out.
- Check out companies that offer the specific service of making loans to people in bankruptcy who want to redeem their vehicle.
Companies That Make Redemption Loans
Some companies specialize in making auto loans to those who want to redeem a car loan in bankruptcy. These companies will finance a new auto loan—generally through a bank—to produce the cash to pay off your car loan; then you pay the redemption amount to the new lender over time.
If you miss payments under the redemption loan, you’ll lose your car to the new lender, though your monthly payments should be smaller. To qualify for a redemption loan, you must meet the lender’s criteria for borrowers and the car must be in good enough condition—that is, worth enough—to protect the bank’s loan.
A couple of the best-known redemption lenders are 722 Redemption Financing and FreshStart Loan Corporation. We aren’t affiliated with either of these companies and don’t receive any incentive for providing this information. We offer these links only as a way for you to start your own research on redeeming your loan.
To learn more about bankruptcy rules before you file your case, see Legal Consumer’s bankruptcy learning center.