When considering Chapter 7 Bankruptcy people always want to know whether they can keep financed vehicles. If payments to the lender are current, the answer is almost always ‘yes’. Additionally, Chapter 7 bankruptcy, provides the opportunity to refinance loans on personal vehicles to the fair market value of the vehicle by “…paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full a the time of redemption.” U.S. Code: Title 11 Section 722. This means a car lender is entitled to receive fair market value of the property, which is often much less then the loan balance. Financed vehicles with ‘negative equity’ are especially common when the loan involved: balance roll-over from a previous loan; unethical car dealers; steep depreciation; zero down payments financing; lenders cross-collateralization; and excessively long loan terms.
The Bankruptcy Code’s basis for allowing redemption is that Chapter 7 bankruptcy also lets people simply surrender property back to the lender. When surrender happens, the lender gets the property back and recoups the fair market value of the property upon resale. Redemption puts lenders in essentially the same position as if the property were surrendered.
Although redemption put lenders in the same position as if the property were surrendered, redemption can provide substantial benefit to someone with an upside down car loan. For example, if $20,000 is owed while the vehicle’s fair market value is $10,000, reducing the vehicle balance to $10,000 may be possible with a new post-bankruptcy redemption loan. At the same time all debt associated with the old loan is eliminated by the bankruptcy.
The apparent difficulty of getting financed for a lump sum payment is mitigated by the presence of lenders who specialize in bankruptcy redemption/refinance loans. They include:
722 Redemption Funding, Inc: https://www.722redemption.com/
Fresh Start Auto Loan Affiliates: http://www.freshstartloans.com/fslc/home.asp
Redemption Funding Inc at: http://www.manta.com/c/mmd27cd/redemption-funding-inc
Redemption loans typically have a high interest rate, which must be considered before entering the loan. If the interest rate or other loan terms negate the benefit of principal reduction you should review other options with your attorney.
In summary, there are multiple ways to keep a financed personal vehicle while filing Chapter 7 bankruptcy. One possible option is redemption, which not only allows retention of the vehicle but also reduces the amount to be paid for the vehicle. A bankruptcy attorney at Bellah Perez, PLLC can help you determine the best way to keep your financed vehicle while at the same time getting the bankruptcy relief you need.
-Jeffrey Wolfe, Bankruptcy Attorney