Chapter 7 bankruptcy, often referred to as “straight bankruptcy”, is a proceeding through which an honest debtor can discharge most if not all of her debt. Although technically the bankruptcy code allows a trustee to liquidate (sell) some of the debtor’s assets and divide the proceeds amongst his creditors, in reality this very seldom happens. In the vast majority of chapter 7 bankruptcies, the debtor is able to exempt the assets which he owns and thereby prevent the trustee from selling them. We refer to this as a “no asset bankruptcy”.
Although a debtor can discharge her debt in a Chapter 7 Bankruptcy, sometimes difficult decisions need to be made when it comes to secured creditor. A secured creditor is a creditor that has a lien against property owned by the debtor. For instance, when you borrow money to buy a car the lender normally places a lien on the car’s title. Upon filing chapter 7 bankruptcy, the debtor must express her intentions with respect to the secured creditor. Generally, the debtor can either surrender the car and discharge the debt, agree to keep paying for the car (reaffirm the debt) or pay the creditor the value of the car in a lump sum (redeem the collateral).
Keeping Your Car
So how long can the debtor keep her car after filing chapter 7 bankruptcy if she doesn’t want to keep paying for it and can’t afford to pay the creditor the car’s value in a lump sum? Must the car be surrendered immediately? The answer is no. In many cases, our clients retain their cars for weeks if not months after filing bankruptcy. This is true because the creditor cannot simply come and get the car after the bankruptcy is filed. Upon filing, the bankruptcy court issues an order called an automatic stay which prohibits creditors from collecting money owed by the debtor. The creditor must either seek the court’s permission to gain possession of the car (seek relief from the automatic stay) or wait until the bankruptcy process is over. Since many car lenders will finance a new car for an honest debtor immediately after their bankruptcy discharge, they often go no time at all between surrendering the old car and buying a new one.
Please note that in order to retain the options set forth above, the debtor must still have possession of the car when his chapter 7 bankruptcy is filed. If the car is repossessed prior to filing, these options may not exist. It is thus important to seek the advice of experienced bankruptcy counsel before you get too far into debt. Don’t wait until it is too late to explore your options.