When a debtor files Chapter 7 bankruptcy, they have several options for handling the debt associated with their car:
Chapter 7 Bankruptcy Car Loan Option #1
The first option for debtors in Chapter 7 bankruptcy is the surrender of their car and the discharge of their car loan balance. If they choose this option, the vehicle financer will auction off the car and if there is a balance, that balance will be discharged by the bankruptcy trustee. After the Chapter 7 bankruptcy case is closed, the car loan balance on the debtor's credit report will show zero and a discharged in bankruptcy status.
However, what usually happens is that the debtor keeps the car and continues to make payments after bankruptcy although they have no legal obligation to do so. Why? Well, the vehicle financer really does not want the car back, so what they will often do is allow the debtor to keep the car if they continue making payments. Most vehicle financers will report these post-bankruptcy payments to the credit bureau; but there are some vehicle financers who will not and might insist that the debtor sign a reaffirmation agreement.
Chapter 7 Bankruptcy Car Loan Option #2
Since some vehicle financers insist that the debtor sign a reaffirmation agreement if they want to keep their car, some debtors may be forced to reaffirm their car loan debt, if they want to keep their vehicle after bankruptcy. A reaffirmation agreement basically states that a debtor agrees to pay a debt after bankruptcy. Failure to pay the debt after bankruptcy when a debtor has signed a reaffirmation agreement could result in creditor collections actions and lawsuits.
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