As a Northeast Florida bankruptcy attorney, this issue comes up on a daily basis. In chapter 7 cases, many debtors are faced with the issue of either reaffirming debt, surrendering the property that secures the debt, or rolling the dice and pay the debt without reaffirming the loan. The decision comes up most often with motor vehicles and household goods.
In many cases, the debtor is asked to reaffirm a car loan which exceeds the value of the vehicle. Sometimes that excess is substantial and the debtor struggles between having no vehicle, having an excessive debt on a vehicle, or hope to find post-bankruptcy financing for a new vehicle. Furthermore, if the debtor(s) reaffirms the debt, the debtor(s) remains personally responsible for the debt post-bankruptcy. If there is a default post-bankruptcy on the loan, the creditor may be able to pursue the debtor(s) for a deficiency balance if forced to repossess the vehicle.
Redemption allows the debtor to purchase the vehicle at the fair market value from the creditor who currently finances the vehicle. The only drawback is that the debtor must make a lump sum payment before the conclusion of the bankruptcy in order to redeem the collateral.
Most debtors do not have access to resources that would allow them to make this type of payment; however, there is a growing trend in business industries extending lines of credit to debtors and using the vehicle or good as collateral for the loan post-bankruptcy. Of course the debtor must be approved for the financing and it may seem counter-intuitive that the debtor would apply for a car loan while the bankruptcy is pending, but it could reduce the amount owed by thousands of dollars and could substantially lower the debtor’s car payment.
In chapter 13 cases, the debtor may be able to “cram-down” the value of the loan down to the value of the vehicle with a significantly lower interest rate. There are a few qualification measures that need to be taken into consideration before the action is taken in bankruptcy court. Consult with an experienced bankruptcy attorney about the redemption process and cramming down your vehicle and other household goods in bankruptcy.
Parker and DuFresne
