Written by: Michael O. Wells
In an earlier blog post, I discussed the reaffirmation process, where you agree to keep the loan on your car “alive” and to survive your Chapter 7 bankruptcy discharge. But is reaffirmation the right way to go in all cases? No! If your car is “underwater”, in that the value of the car is well below what you owe on the loan, and particularly when the car is an older, high-mileage car, you maybe better off not reaffirming the car loan. Let say that your vehicle develops serious engine or transmissions problems sometime after your bankruptcy discharge. If you reaffirmed the car loan, you would still be on the hook for the remainder of the car loan payments on a non-functioning car! However, if you did not reaffirm the loan, and instead simply kept making “voluntary payments” on the loan, you would have the option of returning the car to the lender and walking away from the car loan. Your Chapter 7 discharge will have extinguished your personal responsibility to make the loan payments. The great majority of lenders will accept voluntary payments and not require that you enter into a reaffirmation agreement, but keep in mind that Ford Motor Credit will insist on your signing such an agreement.
There is another option if your vehicle is significantly “underwater”, and that is redemption. Redemption means that you pay off the loan company and take back the title to the car by re-financing the loan with a specialist loan company such as 722 Redemption Funding, Inc. The advantage in redemption is that only the fair market dealer retail value of the vehicle is paid to the original lender, not the pay-off on the current loan. For example, let’s say that your car is worth $10,000.00 according to the Blue Book Dealer Retail valuation, and your loan balance is $20,000.00. The loan company is only going to be paid $10,000.00 and they then turn over the title to the redemption funding company. Your new loan principal is reduced by 50%, which will result in lower monthly payments. 722RedemptionFunding.com will do an analysis of your current car loan and vehicle value and tell you if redemption would make sense in your situation.