Types of Debt in Bankruptcy
There are two general types of debt in a bankruptcy proceeding, secured and unsecured debt. Secured debt is debt that is secured by collateral, such as a car loan or a mortgage. Both of these types of debt are secured by either your car or your house. If you fail to pay a secured debt, a creditor can come back and take back the collateral in order to pay for the loan. Unsecured debt is debt that is not secured by any collateral, such as credit cards and medical bills. This type of debt is dischargeable in bankruptcy. There is also a third type of debt, priority unsecured debt. This type of debt is unsecured debt, but under the law, it is given special priority and is not dischargeable. Priority unsecured debt would include spousal or child support and any unpaid taxes.
Car Loans in Bankruptcy
A car loan is a secured debt. When you file for personal bankruptcy with a car loan, you have the choice whether to keep the debt and the collateral by reaffirming the debt, or surrendering the property. If you surrender a car loan in bankruptcy, you will have to give up the vehicle, but will also not owe anything further for the loan. Surrendering a car loan in bankruptcy is a good idea if your car is worth far less than you owe on the vehicle. By surrendering a vehicle, you will not owe any outstanding deficiency amounts to your car loan lender and they will be unable to come after you for any debts.
Reaffirming a Car Loan in Bankruptcy
If you wish to keep your car loan after the bankruptcy, you may be required to sign what is called a "reaffirmation agreement". This agreement takes the car loan outside of the scope of the bankruptcy and makes you personally liable for the loan. You are usually only able to reaffirm a debt if you are up to date on the payments for the vehicle and if the judge approves the agreement. If you are unable to prove that you can afford the payments or if the payments are not reasonable, a judge may deny approval of your reaffirmation agreement.
