Bankruptcy and Secured Debt — the Car Edition

I can’t count the number of times I have answered the phone, and the first words out of the caller’s mouth (before Hello, my name is. . . , etc.) are, “If I file for Bankruptcy can I keep my car?”

If everyone who filed for Bankruptcy automatically lost their cars, don’t you think you’d have heard about it by now?   Do you really think car dealers would ignore advertising to  this large a market?  So, when was the last time you saw an ad for a car lot that went like this.

So, you need to file for Bankruptcy.  You’re going to lose your car, of course; but we all know you can’t live in Oklahoma without a car!  So, you just come on down and pick out a replacement.  We will hold it until your Bankruptcy is safely filed.  Don’t you worry, we’ve got ways to get you into that car as soon as you lose your old one. After all, you don’t want to be one of those thousands of bankruptcy filers out hitch hiking to work!

Doesn’t sound too familiar to me either, but it was kind of fun to write.

The fact is that when it comes to secured debt in a Chapter 7 Bankruptcy you generally have four options:

  • Reaffirm;
  • Retain;
  • Surrender; or
  • Redeem.

A reaffirmation agreement recreates the debt post-petition.  That sentence is fraught with meaning.  First of all, it is an AGREEMENT.  That means that you must agree to it, but the Creditor must agree to it as well.  So, if the creditor is sick of you, you cannot force them to let you sign a reaffirmation agreement.  Also, the agreement terms may well require that you be current on your payments as of the time of the Bankruptcy filing.

Second, the reaffirmation recreates the debt post-petition.  That means it is effectively after the bankruptcy.  If you subsequently default, the creditor will have all of the rights that they would have had if you had never filed.  This means you lose the benefit of the Bankruptcy discharge with respect to the reaffirmed debt.

Retain and pay is an option that varies dramatically by jurisdiction.  The 2005 Bankruptcy Reform Act tried to do away with this option, but like many parts of the Act, it wasn’t quite as well drafted as it could have been.  The long and the short of it is that depending on a number of factors including:  where you live, the terms of your loan, the relevant State law and even the identity of your lender; you may be able to simply keep making your payments.

Surrender is pretty self-explanatory.  If you don’t want the car or can’t afford to keep the car, you can give it back to the lender and discharge any remaining obligation for the loan.  Wash your hands of it, be done, over.

Finally, there is redemption.  Redemption is really kind of cool and deserves its own post — which it is going to get.  However, in a nutshell the right to redeem property is the right to pay the lesser of the value of the property or the amount owed in a lump sum to the lender and get a lien release.  So, owe $2,500 on a laptop now worth $300?  Pay the $300 and keep the laptop.  Owe $36,000 on a pickup worth $13,000?  (Why, no, I did not just make up those numbers.)  If you can find a way to pay the $13,000 in a lump sum, you can keep the truck and be done with the $36,000 loan.

As usual, the devil is in the details; and that is nowhere as true as it is with the concept of redemption.  So, check back for a post on how to make it happen — or not.



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