Should I Keep my Financed Vehicle in a Colorado Chapter 7 Bankruptcy?

December 19, 2010
By: David M. Serafin

With many of my bankruptcy clients in the Denver area, the question is not can I keep my vehicle but, rather, should I keep my vehicle, particularly with one or more “upside down” vehicles (which, unlike real estate, typically depreciate even in a strong economy). Since the onset of the current economic recession and the accompanying newer stringent lending standards, it not only more difficult to obtain a mortgage but also a decent vehicle loan.

In a chapter 7 bankruptcy a debtor typically has the following options with regard to a vehicle loan:

• Retain and Pay – This is usually the best option as it allows the bankruptcy debtor to simply keep making the same monthly auto loan payments outside of the bankruptcy. The danger is that (in my experience) lenders are becoming more aggressive about the debtor not simply retaining and making the same monthly payments. These lenders will threaten to repossess the vehicle is the debtor refuses to formally reaffirm the debt. (But, I have never once seen a situation where a vehicle was repossessed if my client was current on all monthly payments.)
• Reaffirmation – Unless a debtor has a significant amount of equity to protect which would be otherwise lost if the vehicle’s repossessed, I almost always recommend against signing a Reaffirmation Agreement as it re-obligates the bankruptcy debtor to a NEW, post-bankruptcy petition debt which (if not paid off) could only be discharged in another, subsequent case (who wants to even go here).
• Redemption – While all of the other options are also available in chapter 13, redemption is only expressly permitted by the Bankruptcy Code in chapter 7. If the debtor somehow is able to pay in cash (this is rare) the current fair market value of the vehicle, the vehicle will be saved and any deficiency balance will be eliminated.
• Surrender – The debtor can simply surrender the vehicle back to the lender with the current bankruptcy discharging any deficiency balance owing. This option is particularly recommended only if the debtor has negative equity in the vehicle.

So, prior to making a decision with regard to a vehicle loan, it is critical to evaluate the following factors: fair market value versus debt of the vehicle, whether the debtor has any cash reserves to redeem the vehicle, whether any equity exists in the vehicle such that a Reaffirmation Agreement may be feasible, how the debtor can obtain a different vehicle in lieu of electing any of the aforementioned options, and whether the current vehicle is in sufficient condition to allow for continued use while the debtor builds credit.

(Note that a Cram Down of a vehicle loan down to its fair market value and reduction of the interest rate can only be done in a chapter 13 bankruptcy, so long as the vehicle was purchased over 910 days (2.5 years) prior to the date of the bankruptcy filing.)