A debtor's vehicle is affected by bankruptcy in different ways depending on whether the vehicle was leased or purchased and which bankruptcy chapter was filed. If the vehicle was leased then the debtor has to choose whether to assume or reject the lease. Assumption of a lease obligates the debtor to continue making payments to the lessor under the contract terms and in return the debtor gets to continue driving the vehicle. Rejecting a lease means that the contract is no longer binding on the debtor but they must return the vehicle to the lessor. Leased vehicles are affected the same way in both Chapter 7 and Chapter 13 bankruptcy cases.
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Vehicles that were purchased by the debtor and are collateral for loans are treated differently depending on the bankruptcy chapter the debtor filed. In Chapter 7 cases the debtor must decide whether to surrender the vehicle and discharge the debt, reaffirm the debt which allows the debtor to keep the vehicle but also binds them to a new contractual obligation which survives the bankruptcy discharge, or to redeem the vehicle which means to pay the lender an amount equal to the value of the vehicle in exchange for full satisfaction of the lender's claim.
In Chapter 13 bankruptcy cases the debtor may continue to make payments directly to the lender under the original contract terms or include repayment of the secured loan in their Chapter 13 plan. Including repayment of the claim in the plan sometimes has advantages, such as the ability to reduce the payoff to an amount equal to the value of the collateral, reduce the interest rate, and increase the amount of time to pay off the claim which may reduce the monthly payment. However, there are some risks involved in including a secured claim in a Chapter 13 plan. In the plan the creditor may not receive as much each month as they would have under the contract. If the bankruptcy fails for some reason the debtor may have to come up with a large sum of money to bring the claim current under the original contract or risk losing the vehicle to repossession. Each option has different procedural and legal requirements and should be discussed carefully with a bankruptcy attorney.
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