What Happens If I Am Financing a Car and I File Bankruptcy?

People are concerned about what will happen to their car if they file bankruptcy. Clients in the Bronx, Queens, Brooklyn, Long Island and Westchester ask us this all the time.

In a prior post ( What Happens to My Car in Bankruptcy ) we covered what happens if the car is paid for. In this post we cover what happens if the car is being financed. In a later post we will cover what happens if the car is being leased.

What Happens If My Car Is Being Financed?

The discussion regarding the debtor’s equity in the car in our earlier post ( What Happens to My Car in Bankruptcy ) still applies to the equity in a car being financed.

With that in mind there are basically three options available to a debtor under the Bankruptcy Code, and fourth option not mentioned in the Bankruptcy Code that may also be possible. The options are:

1. Surrender Option (Give the Car Back). One option is to “surrender” or give the car back to the finance company. The debtor has the option to give back the car and discharge the debt (i.e., wipe out the debt in bankruptcy). Now days, however, many car finance companies are willing to try to restructure the loan with the debtor (see Reaffirmation Option below) because they don’t want the car back.

2. Redemption Option (Pay the Current Value of the Car). Another option the debtor has is to “redeem” the car by paying the finance company the current fair market value of the car in view of its age and condition. This is typically paid in a lump sum, but could be paid over time if the creditor agrees. There are also a few companies that specialize in “redemption loans” to debtors in bankruptcy.

3. Reaffirmation Option (Agree the Debt Will Not Get Wiped Out). Another option is to enter into a “reaffirmation” agreement with the creditor. A reaffirmation agreement is an agreement between the debtor and the creditor that even though the debtor has filed bankruptcy the claim owed to the creditor will not be discharged (i.e., will not get wiped out) in the debtor’s bankruptcy case. Creditors like to try to try to push debtors to agree to reaffirm debts because otherwise they can only repossess (i.e., “repo”) the car if the debtor defaults in the future and cannot go after the debtor for a deficiency (i.e., the balance remaining unpaid after the car is sold at auction). If the debtor agrees to a reaffirmation agreement he/she is agreeing that even though he/she filed bankruptcy the car debt wont get wiped out and he/she will be responsible for any future deficiency. Some attorneys in New York simply refuse to assist any clients with reaffirmation agreements. Our firm’s philosophy is a little different — we explain the pros and cons of reaffirming or not reaffirming, but if it is something the client wants to do we will are willing to assist them with that. Some clients have been able to obtain modification of loan terms and monthly payments as part of a reaffirmation.

4. “Ride Through” Option. Prior to the 2005 amendments to the Bankruptcy Code that were brought about by creditor lobbying, a debtor could elect a fourth option which was commonly known as “ride through.” Under this option the debtor stays current with payments on the car, but doesn’t reaffirm the debt. If the debtor defaulted the creditor wasn’t able to go after the debtor. The current status of “ride through” since the 2005 amendments is unclear. There is no decision of the Second Circuit Court of Appeals on this issue. Some car lenders are more aggressive than others about demanding surrender of the car if there is reaffirmation or redemption (and will repo it if the debtor doesn’t voluntarily surrender). Other car lenders seem to still be willing to permit ride through.