When you file for bankruptcy, you will also need to determine what will happen with your car debts. You can choose whether you would like to walk away from the collateral that secures your debt, pay for the collateral at market value or choose to reaffirm the debt. If you reaffirm the debt, you may also be able to renegotiate your debt and save money.
The Act Of Reaffirming Debt
Reaffirmation is the act of affirming that you still owe the lender. This is ideal if you would prefer to keep the car that serves as collateral for your debt.
The Renegotiation Of Purchase Debt
Whether you are allowed to renegotiate your debt is based on whether you have purchase or non-purchase debt. With purchase debt, your debt comes from the value of the car. The car is usually new, so the lender usually believes that he or she can recoup some of the value of the loan if they sell the car after it has been repossessed. Still, you may be able to slash your debt significantly since you are able to walk away from the debt and creditors often do not recoup the full value of the vehicle at an auction. You may also be able to negotiate for lower monthly payments and a lower interest rate.
The Renegotiation Of Non-Purchase Debt
The second type of secured debt is non-purchase debt. This is when you already own the collateral, but you have used an asset as collateral for a personal loan. An example of this is a title loan in which you will be able to use your car as collateral to obtain a loan to purchase something else. Given that collateral used for non-purchase debt tends to be older, the lender is often not as confident that he or she will be able to successfully sell the property. This is helpful when trying to negotiate down the value of the loan. However, if you only own a very small lien on the vehicle, the lender might be more willing to repossess because the loan will only be for what the lender believes that he or she can sell at an auction.
The Advantages And Disadvantages Of Reaffirming Debt After Chapter 7
The downside of reaffirming debt is that you cannot walk away from it. You may be stuck with the debt for a long period since there is a time limit before you are able to file for bankruptcy again. However, given that you will have discharged most of your debt, you may find that it is much easier to pay for your secured debt. Also, making the payments on time is a great way to repair your credit score.
For a bankruptcy attorney, contact a law firm such as Shoemaker & Dart P.S. Inc.