Automobiles and Chapter 7 Bankruptcy

When you file a Chapter 7 bankruptcy, as long as you are current on your vehicle payments, then you can usually keep your vehicles in bankruptcy and will have no issues with repossession of it in the bankruptcy.  If you are not current, then it is possible that the bank might move to repossess the vehicle (which they would do whether you filed the bankruptcy or not most likely), but if you are current then you would need to just keep making your monthly payment in order to keep your vehicle in most cases. 

If you file Chapter 7 bankruptcy in Alabama and receive a discharge while continuing to make your monthly payment on your vehicle throughout the bankruptcy, then if you fall behind later on and they repossess your vehicle, then they can only get what they sell the vehicle for and cannot come after you for the difference in what they sold the vehicle for and what you owed.  This difference in what you owe and what they sell the vehicle for is called a deficiency, and normally you would owe this if they repossess your vehicle, but this is discharged in your Chapter 7 bankruptcy.

This means that you could, technically, make your monthly payments during a Chapter 7, receive your discharge, and then decide that you don’t want to keep the vehicle and just give it back to the bank and not owe anything on it, since the bank will only be able to get what they can from the sale of it and not be able to come after you for the deficiency.  This is sometimes called “surrendering your vehicle” in a Chapter 7 bankruptcy and is a way for you to get out from under your vehicle debts as long as you are willing to give it back to the company.

In Chapter 7 bankruptcy, there is a document called a reaffirmation agreement that is essentially an agreement between you and the bank, similar to the one that you had with them prior to the bankruptcy filing.  If you sign this reaffirmation agreement, then you will basically owe any potential deficiency amount should your vehicle be repossessed in the future.  However, by signing this reaffirmation agreement the company will report each payment you make a payment to the credit agencies which could help your credit score improve.

Also, some banks will require you to sign a reaffirmation agreement in order to keep your vehicle, even if you are current on your payments.  For example, credit unions and certain other creditors will require this in your Chapter 7 bankruptcy.  If you are not completely current on your payments, they might let you include your arrears in the total and do a reaffirmation agreement to get current, but they will likely want you to sign this agreement either way.  Most vehicle lending companies do not require you to sign such an agreement in order to keep your vehicle as long as you are current but this depends on the creditor in your particular case.

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