Redemption, Reaffirmation and Surrender Under The Bankruptcy Act

Written by Adam Peck Category: Nursing Homes January 23rd, 2013 4 min read

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), bankruptcy filers have three options when dealing with property such as a vehicle or home — redemption, reaffirmation or surrender.

1) Surrendering the vehicle:

The simplest option is to surrender the vehicle to the creditor, particularly if you won’t be able to continue making payments. When the creditor receives the vehicle back, the bank or auto dealer most likely will sell the car at auction. Typically, the auction sale price will be less than the remaining auto loan balance (the remainder is called the “deficiency balance”). The bankruptcy filing discharges that balance as it does all other unsecured debts.

What you need to know: Make all auto insurance payments until you hand over the vehicle. Be sure the dealer gives you confirmation in writing that you have handed over the vehicle.

2) Reaffirming your existing loan outside the bankruptcy filing:

If you have the choice and can afford the payments, you might prefer to keep the vehicle and keep the loan. Reaffirming means you will agree not to have a debt discharged, and will continue to pay the loan. Be aware that if you default on the auto loan after the bankruptcy case is closed, the creditor will have every legal right to pursue you for repayment just as if the bankruptcy filing had not happened. That means that if the vehicle were sold at auction (as in option 1, above), any remaining debt would not be discharged, but would be your responsibility to repay.

What you need to know: If you go this route, confirm with your lender before you sign the reaffirmation agreement that they will report the reaffirmed vehicle loan to the credit bureaus. The proof that you make the payments will help you begin to rebuild a credit history post-bankruptcy.

3) Redeeming the loan:

This option is most often used for consumer goods, like household appliances, which can be paid off in a lump sum, but sometimes it applies to vehicles as well. Redemption means that you might pay off an asset at its current fair market value, and the bankruptcy court would discharge the rest of the debt balance. In the case of vehicles, bankruptcy law (section 722, giving these loans their common name, “722 Redemption loans”) will let you obtain a new auto loan for the vehicle at the current fair market value. If you owe more than the car is worth and hope to keep your vehicle, this option might be worth a try.

What you need to know: Usually, you must own the car for 30 months (910 days) prior to filing to qualify for a car redemption loan. Confirm the details that apply to your situation with your attorney, lender or a specialized car redemption loan company.

If you plan to keep the auto loan that you had prior to bankruptcy, be aware of how your payments will be calculated after you file bankruptcy. Filings for Chapter 7 (using the means test) and Chapter 13 with above-median income (using the disposable income calculation) calculate the expense deduction the same way. In the filing, the vehicle debt expense deduction includes the payments for the next 60 months, divided by 60 — no matter how many or how few payments remain. If you believe you will need to purchase a new vehicle in the near future, evaluate carefully whether it is worthwhile to keep your current car.

Buying a car post-bankruptcy:

After filing bankruptcy, it is possible to buy a vehicle after following these steps:

1) Work to rebuild your credit before you apply for a loan. Pay all bills on time, in full. Obtain a credit card (you will likely qualify only for a secured credit card at first, where you must first make a payment and then charge against it). Charge some minor purchases and pay the balance off every month.

2) Confirm with the credit card lender that it will report all of your credit card payments to the credit bureaus.

3) Once a year, order your credit report so that you can monitor the information on your credit file. If you see any inaccuracies, request that they be corrected.

4) Save for a down payment on your vehicle purchase to demonstrate your good intentions.

5) When you are ready to buy a car, talk to several lenders or dealers. Ask whether they finance people who have filed bankruptcy and, if so, what annual interest rate you should expect. (Be aware that the rate will be high.) Do not fill out an application until you have the information you need to choose a lender.

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Written by Adam Peck

Expertise: Personal Injury

Adam J. Peck, ESQ is a principal with Peck Law Group, APC. In 2008, Mr. Adam Peck received his Juris Doctorate from Whittier Law School where he graduated Cum Laude. His practice is primarily dedicated to representing Elders, Dependent Adults, along with their loved ones and family members, who have suffered horrific personal injuries.