Redemption in Chapter 7 Bankruptcy: Keep Your Car But Lower the Payment

TRI Writer • May 18, 2022

Chapter 7 bankruptcy is known as the liquidation bankruptcy because the bankruptcy court liquidates the petitioner’s assets to pay their creditors (with exemptions, of course). However, did you know that you can decide whether to keep or surrender your car or truck during a Chapter 7 bankruptcy?

What Happens to Your Car During a Chapter 7 Bankruptcy?

There is no motor vehicle exemption in Tennessee, but petitioners may choose to use their $10,000 wildcard exemption to exempt car equity. If you can’t protect the equity in your car with an exemption, the trustee will sell the vehicle. Suppose you aren’t current on your car loan payments when you file. In that case, the auto loan lender will likely use its lien rights to get the vehicle back by either requesting that the court lift the automatic stay to repossess the vehicle or waiting until the bankruptcy is final to repossess the vehicle. However, a couple of other options could allow you to keep your vehicle when filing for Chapter 7 bankruptcy.

What is Redemption During a Chapter 7 Bankruptcy?

If your car is valued at less than the amount you still owe on the loan, Chapter 7 bankruptcy allows you to redeem the loan by paying the vehicle’s value. You keep the vehicle free and clear when you redeem your vehicle in a Chapter 7 bankruptcy. However, to redeem a vehicle, the petitioner must provide the car’s current value in full in a single payment, which would require using money protected with a bankruptcy exemption or money earned, borrowed, or received as a gift after filing.

What is a Reaffirmation Agreement?

In some cases, Chapter 7 bankruptcy petitioners that want to keep their vehicle can do so using a reaffirmation agreement. The reaffirmation agreement allows you to keep your car during a Chapter 7 bankruptcy without doing anything outside what you already agreed to do. The Chapter 7 bankruptcy petitioner agrees that the specified auto loan is excluded from the bankruptcy by signing a reaffirmation agreement. The petitioner remains liable for the balance and payment at the same terms of the original loan agreement. The lender transfers the vehicle title when the loan is paid off. The reaffirmation agreement is a new contract that allows Chapter 7 bankruptcy petitioners to keep their car under the same terms as the original loan agreement or promissory note.

We understand that financial struggle is complex, and we want to help. If you have questions about bankruptcy and what happens to your car during a Chapter 7 bankruptcy, please don’t hesitate to contact Ken Rannick. You are in good hands with Kenneth C. Rannick P.C.

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