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  • Writer's pictureDaniel Rodriguez

Redeeming a car in a Chapter 7 bankruptcy

The automatic stay When a Chapter 7 bankruptcy is filed, the court the case is assigned to issues what is known as an automatic stay. This is a court order that prohibits creditors from taking any further steps to collect debts included in the bankruptcy. This means that filing a Chapter 7 bankruptcy temporarily prevents vehicle repossessions even when automobile loans are seriously delinquent.

Reaffirmation, redemption or return What happens next will be determined by how much the vehicle is worth and how much it will cost to pay off the loan. When cars are worth far less than the amount owed, returning them to banks may be the wisest option. When the numbers skew the other way, it could make more sense to reaffirm the loan or redeem the vehicle. Reaffirming the loan involves forgoing bankruptcy protection and agreeing to keep making payments. Redeeming the vehicle involves paying off the outstanding loan or working out a deal with the bank based on the car's current value.

Beware of predatory lenders Predatory lenders know that people become emotionally attached to their vehicles, which has given rise to a niche lending product called redemption financing. These are high-cost loans made to desperate borrowers that often seem more affordable than they are because of balloon payments. Financing offers made to people with recent bankruptcies are rarely attractive, and this is especially true of redemption loans.

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