When you file your bankruptcy papers, you'll be asked what you want to do about your "secured debts" and the property (collateral) that secures them. You'll be asked to fill out a form stating what you intend to do about these debts and this property.
Within 45 days after the 341 hearing you must act on those stated intentions.
Reaffirm? Redeem? Surrender? Ride Through?
If you file for bankruptcy, you'll be asked what you want to do about your property securing a loan on the "Statement of Intention" form (Form 108)
- Choose to keep the property, and
- reaffirm your personal liability on the debt, via a "reaffirmation agreement with the lender — which keeps you responsible for the debt, despite your bankruptcy.
- or redeem the property by paying its current value to the creditor — done and done.
- Surrender it back to the lender, and
- wait for the lender to come pick it up (get the keys or tow it), or
- ...or "ride through" by keeping making monthly payments on the property as long as the creditor doesn't repossess it — even though you can't be sued for any personal liability, and hope they creditor lets you keep the car.
(This "informal" practice varies widely across the nation. Talk to a local bankruptcy lawyer to determine the custom in your district. Also with used cars rising in value, this practice of letting debtors retain the vehicle is less common if the used vehicle can be easily sold in a hot market.)
- If you surrender the car, your obligation to pay the car loan is discharged along with your unsecured debts. That's why creditors may be disinclined to let you "ride through", because if the car stops working or is damaged, you can simply walk away from it, and not owe anything more — and all the creditor may be left with is the damaged or neglected vehicle's salvage value at the junk yard.
If you decide to reaffirm, you'll need to sign a reaffirmation agreement and have it approved by a judge
Bankruptcy is designed to get you out of personal liability for debts. So courts frown on the idea of reaffirming a debt, and the government provides a model form that shows in clear terms the deal that the creditor is authoring. A judge will not approve a reaffirmation agreement that is too sweet a deal for the creditor. Also, if your property is old, you may have rights to get a lower interest rate than the creditor is offering.
The bankruptcy judge does not want to see your fresh start hobbled by bad contracts from greedy creditors, so your reaffirmation agreement will be reviewed before it is approved.