Reaffirmation, Ride-Through, Redemption, and Surrender
These options only apply to vehicles that are financed or leased. If you own a vehicle outright, whether you can keep it depends on how much of the value can be claimed as exempt. Chapter 7 trustees are very reluctant to seek a vehicle turnover since most debtors’ vehicles are not worth much over the claimed exemption. The most common exemptions used are those for vehicles, tools of the trade, and the wildcard.
When someone files bankruptcy and has secured debts, they have to decide what they intend to do with the property that the debt is secured by.
Note: The most common of these secured debts are financed vehicles, but these same options would also apply to other security agreements such as tools and furniture. For the sake of clarity, I will only refer to vehicles.
Reaffirmation
Reaffirmation is the most common option that our clients want to choose in order to keep their vehicle. One common myth about bankruptcy is that you must reaffirm to keep a vehicle through a Chapter 7 bankruptcy, but this is not true. The reaffirmation process starts with the debtor indicating in their bankruptcy documents that they intend to reaffirm the debt. In most cases, the lender will then send our office a reaffirmation agreement, and we will assist our clients with completing the proper forms to be submitted to the court. However, lenders are not obligated to offer reaffirmation.
Pros:
- The only somewhat significant advantage to reaffirming a debt is that it will continue to be reported on your credit, resulting in a credit “boost,” which can be helpful post-bankruptcy. However, the effect of bankruptcy on your credit report is widely misunderstood:
- Your credit score does not matter unless you are trying to obtain credit.
- For most people who go into bankruptcy with bad credit, there is no direction for your score to go other than up.
- If your credit is good when you go into bankruptcy, the negative effect is relatively minimal and short-lived.
Cons:
- Reaffirmation creates a “new” debt which not affected by the bankruptcy. If something happens later on down the line, you will be stuck with that debt and be fully liable for a deficiency. The car could break down, be involved in an accident, or might just become unaffordable.
- Reaffirmation requires that your attorney determine whether they believe that reaffirmation could cause an “undue hardship.” When I am reviewing a reaffirmation agreement, I will consider things like the terms of the reaffirmed loan, my client’s budget, the necessity of the vehicle, and other less burdensome options. If your attorney does not think that reaffirmation is in your best interests, you can request a hearing for your judge to decide. Since judges will weigh the same considerations as your attorney, it is unlikely that a judge would make a different determination. If neither your attorney nor the judge will sign off on the agreement, then you will default to the “ride-through” option if you still want to retain the vehicle.
- Lenders are not required to allow reaffirmation if it is requested, so this may not be an option.
Ride-Through
Ride-through is when you do not reaffirm, do not surrender, but instead voluntarily make payments, allowing you to keep the vehicle. Unlike reaffirmation, your personal liability on the debt will be discharged, and this will not result in a new debt that could come back later to haunt you if you later decide to get rid of the vehicle.
Pros:
- Since ride-through does not create a new debt, you will not be on the hook for a deficiency if you later decide that it does not make financial sense to keep the vehicle and continue making payments. If you decide that you want to get rid of the vehicle, you can contact the lender and arrange for them to pick it up.
Cons:
- Since you no longer have personal liability on the debt, it will not continue to be reported on your credit, and you will not get the credit boost benefit of having a secured debt payment history. It might be possible for you to periodically request that the lender provide you with a payment history to send to the three credit bureaus and potentially have those payments reported.
- Some lenders do not allow for a ride-through – most notably, Ford Motor Credit. If your lender does not accept the ride-through, they may repossess the vehicle even if you are current on payments.
Redemption
Redemption may allow you to keep your vehicle by making a lump sum “redemption payment” in an amount equal to the vehicle’s value, regardless of how much the loan balance is. For example, if a car is worth $10,000, and the loan balance is $25,000, then redemption would allow you to pay $10,000, and you would then own the car outright.
Pros:
- If you are in a situation where you want to keep your vehicle, but the payments are unmanageable, redemption could allow you to pay a reasonable amount for the vehicle.
- If you can make the redemption payment yourself, then you would exit bankruptcy without any vehicle debt.
- Unlike the other options with other options mentioned here, redemption requires filing a motion and proving the vehicle’s value. This will increase the complexity of your case, but in most instances, redemption is completed without delaying the closing of your case by more than a few weeks, if at all.
Cons:
- The redemption payment must be made as a single lump-sum payment relatively quickly after the redemption motion is granted. Most people do not just have thousands of dollars burning a hole in their pocket. It is possible to have that payment financed. However, the interest rates on these redemption loans tend to be very high. You might be able to refinance later on down the line.
- Courts are not in complete agreement with what standard of valuation should be used. Some courts will accept a lower standard, such as trade-in, which will be considerably less than what you would otherwise have to pay if you needed to replace the vehicle. Other courts use a higher valuation standard, such as dealer retail value. For courts that use this higher standard, it just does not make sense to go through the headache and costs of redemption since you could pay the same, or less, at a dealership.
Surrender
Surrendering your vehicle will result in the debt being discharged along with your other unsecured debts. You have several options concerning the timing of when you can surrender your vehicle.
- Surrendering before filing will result in the loan becoming an unsecured debt, and the debt would be listed as such in your bankruptcy petition.
- Surrendering during your case would involve listing the debt as secured and indicating on your Statement of Intention that you wish to surrender the vehicle.
- If you choose to do a ride-through, you can surrender your vehicle at any time after the bankruptcy.
Pros:
- If you do not want to keep your vehicle, this process is straightforward, and you only need to make arrangements for the car to be picked up.
Cons:
- Assuming that you have made other arrangements for transportation, there are no cons to surrendering.
How we approach this
For all of our clients, we will review your options and explain them to you so that you can make an informed decision that meets your needs and goals.
