by Walter Metzen
AUTO LOANS AND CHAPTER 7 BANKRUPTCY: BASIC OPTIONS
When you file a Chapter 7 bankruptcy at a time when you owe a balance on an automobile loan, you are required to state your intention as to whether you intend to retain the vehicle “securing” the loan or whether you intend to surrender it.
If you are surrendering a car or other vehicle in Chapter 7 bankruptcy, that is a simple enough matter: your Michigan bankruptcy attorney checks the box for “surrender” on a section of your bankruptcy petition called the “Statement of Intention.”
At some point, during or after the bankruptcy (depending on whether your auto loan lender takes the trouble to file a motion to lift the “automatic stay” injunction that prevents creditors from engaging in collections activity during your Chapter 7 bankruptcy), the creditor with the lien on your vehicle title will take possession of the vehicle.
In other words, it will be repossessed. However, the discharge you receive at the end of your Chapter 7 bankruptcy will prevent the creditor from collecting any “deficiency” debt from you after the vehicle is repossessed and sold at auction.
You are off the hook for payment of the remaining loan balance.
But what if you want to retain the vehicle?
RETAINING A VEHICLE IN CHAPTER 7 BANKRUPTCY: REAFFIRMATION AND REDEMPTION
If you want to retain the vehicle in your Chapter 7 bankruptcy, you have two remaining choices: (1) reaffirmation of the vehicle loan, or (2) redemption.
We have discussed the reaffirmation of vehicle loans previously here. It is process by which you sign, with your lender, and, when appropriate, your bankruptcy attorney, which re-obligates you to the vehicle loan (puts you back on the hook!) even though your Chapter 7 discharge will otherwise free you from the liability.
It is a process to consider carefully—and it is a process which attracts more attention than the further option: redemption.
WHAT IS REDEMPTION IN CHAPTER 7 BANRKUPTCY?
Redemption is an option available only in Chapter 7 bankruptcy. Chapter 13 bankruptcy has different options for dealing with secured debts, about which we will write in a later post.
A reaffirmation puts you back on the hook for your car loan with, typically, the same terms and balance owed under which you purchased or refinanced the vehicle.
Redemption allows you to “buy” the vehicle free and clear out of the Bankruptcy Estate you created when you filed your bankruptcy for what it is currently worth in fair-market value terms.
Any balance you owe on the loan which the vehicle secures as collateral above and beyond that fair-market value amount is then discharged in full with the rest of your dischargeable debt at the end of your Chapter 7 process. The creditor whose lien encumbers the vehicle title must then file a release of lien with the Michigan Secretary of State or face monetary sanctions.
Redemption is an under-utilized process in Chapter 7 because they require a little more work from the debtor filing the bankruptcy—and a little more expense in terms of attorney’s fees and court filing-fees.
However, they are very effective, so long as they are handled properly.
HOW DOES VEHICLE REDEMPTION WORK?
Where your bankruptcy attorney does agree that redemption is a cost-effective option for you, the process of redemption is as follows.
First, you will need a written appraisal of the vehicle’s value utilizing a method of valuation in compliance with current Bankruptcy Court rulings on the subject. Generally, this requires Kelley Blue Book retail value, as assessed by an appraiser experienced in such valuations.
Why do you need this?
You need it because the next step in the process is that your bankruptcy attorney will draft and file a separate Motion to Redeem your vehicle after your Chapter 7 case is filed. As with any motion, you need an exhibit or some documentary evidence supporting your claim. In this instance, your claim is that the vehicle is worth only $X.XX, as opposed to whatever the balance of the loan is.
Once the motion is drafted and filed by your lawyer, the lender’s own bankruptcy attorneys will have an opportunity to respond to the Motion. If they file a response disagreeing with your value, you and your attorney will need to argue before the court in a sort of trial as to the value of the vehicle called an “evidentiary hearing.”
The creditor, if hell-bent on opposing your Motion, will certainly be relying on its own appraisal to argue against your value. You can’t walk into a gunfight with an empty holster.
This often means a little more upfront expense for you as good appraisals may come with a price-tag, but, if your vehicle is worth significantly less than you owe on it and you don’t want to have to try to finance a new one post-bankruptcy with a recent Chapter 7 discharge on your credit report, it could be money well-spent.
Once the Motion is filed, however, if the creditor holding the lien files no response at all, it will be because they recognize that your value is well-founded and fair. You may get a default judgment approving the redemption.
The judgment will require that you pay that redemption amount in a lump sum to the creditor within a fixed timeframe.
If you do so, as noted above, the creditor will be required to release their lien—and you will drive that car out of your bankruptcy free and clear.
If the creditor does file a response, it is often simply an invitation to negotiate a settled-upon redemption amount, somewhere between the values asserted by the two parties.
Your attorney will handle this negotiation, and you will approve or reject any settlement amount.
A good settlement saves both parties the time and expense of further litigation, and that is often the outcome of a Motion to Redeem.
At the end of the day, the benefit of redemption in Chapter 7 is that it is not something you have to ask the creditor for at all. It is something you are allowed to do in Chapter 7 bankruptcy. It is one of the benefits of the process.
In this age of 72-month, sub-prime used vehicle loans at 20+% annual interest, it is an option worth keeping in mind.
REDEEMING YOUR CAR IN CHAPTER 7 BANKRUPTCY: THE BOTTOM LINE
If you are interested in redeeming your vehicle in your Chapter 7 bankruptcy, it is something that you should discuss with your bankruptcy lawyer in advance of filing your petition so that your attorney can properly advise you of the requirements of the process, as well as the expense.
Your bankruptcy attorney will also want to advise you as to his or her opinion as to whether it is a useful process for you. Depending upon the age and condition of the vehicle, its value, and the balance of the loan and the interest-rate involved, redemption may not be a good deal.
Then again, it very well might be. The challenge is always coming up with the lump sum redemption amount, but this is something your attorney can discuss with you in a private consultation.
Contact The Law Offices of Walter Metzen & Associates now to schedule a no-cost, no-obligation initial consultation.