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Can I keep my car by reaffirming the loan under Chapter 7?

People who file Chapter 7 bankruptcy are often concerned about whether they will be able to keep their automobile after filing. Most people in Massachusetts rely on their cars to get to and from work, and losing the car can be a real hardship.

A Chapter 7 bankruptcy is an asset liquidation bankruptcy, meaning the bankruptcy trustee will sell the debtor's assets and use the proceeds to pay creditors. In return, the debtor receives a full discharge of all dischargeable debts.

Both federal and Massachusetts law exempt certain assets from liquidation in Chapter 7. If you own the car free and clear - that is, you don't have a car loan - you will be able to keep it as long as its value does not exceed a certain amount. That amount will depend on whether you choose to use the federal or Massachusetts property exemptions.

If you have a loan on the car, keeping the car will be a little more complicated. A car loan is a secured debt, and the lender has the right to repossess the car if the debtor defaults on the payments. One way to keep the car after filing for Chapter 7 is to reaffirm the debt. This means you enter into an agreement with the lender that you will not include your car loan in your Chapter 7 discharge, and you will continue making the payments. In return the lender agrees not to repossess the car, as long as you keep up with the payments.

A written reaffirmation agreement must be filed with the bankruptcy court before the discharge is granted. The debtor must demonstrate that income earned will be sufficient to make the payments under the agreement. If the income is not sufficient the bankruptcy judge can deny approval of the reaffirmation agreement. A reaffirmation agreement is not always a good idea, and every debtor should consider whether keeping the car is worth it in light of their overall circumstances.

Source: uscourts.gov, "Chapter 7 - Bankruptcy Basics," accessed Dec. 4, 2016

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