Reaffirmation in Chapter 7: Keeping a Vehicle

chapter 7 bankruptcyOne of the common myths about Chapter 7 bankruptcy is that you lose everything. After all, they call it “Liquidation” for a reason, right? Yes, it is true that the general theory of a Chapter 7 is that the nonexempt assets of the estate are liquidated and the proceeds given to your creditors, and you come out fresh and empty like a newborn baby. But, as is so often the case with us lawyers, there are exceptions. One of the biggest exceptions is where you have a vehicle that is financed by a secured creditor and you want to keep the vehicle.

So, can you file Chapter 7 in Alabama and still keep your car? YES.

The process for doing so is called “Reaffirmation” and basically it means that you agree to keep making the normal payments on the vehicle and to not discharge that specific debt.  In return, the creditor lets you keep the vehicle. If you are current on your payments, most lenders want to keep doing business with you, even if you’ve filed bankruptcy. They don’t want another used car: they want the money. So they’re almost always willing to offer you a reaffirmation – many of them will practically beg you to reaffirm their debt, because they want to be able to go after you for the money even after your bankruptcy. This is, of course, the disadvantage to reaffirmation: you’re stuck with the debt even after getting your other debts discharged. But this is why the law gives you a special protection: even after you’ve signed the reaffirmation agreement, you have 60 days to rescind it. So if the vehicle breaks down a month after you sign the reaffirmation, or you lose a job and can no longer make the payments, you can avoid being stuck with the debt left over on the vehicle.

It may seem strange that you’d be allowed to keep such a valuable asset as a vehicle – something worth thousands of dollars. Shouldn’t it get liquidated like any other asset? But when you think about it, it makes perfect sense. Here’s why: if you own a $15,000 F-150, but owe the bank $15,500 on the auto loan, then that isn’t an asset. Or rather, it isn’t your asset. It is the bank’s asset. You just have the right to take title to the vehicle if you ever pay off the loan. So don’t freak out about bankruptcy if you think that you’ll lose your car. If you’re current on it, you have options.