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Bankruptcy judge rules 'ride-through' option no longer available

Individuals who seek chapter 7 bankruptcy relief are often able to keep their vehicle based upon available bankruptcy exemption limits. Many people have outstanding debt on their vehicle when they file for bankruptcy. A chapter 7 bankruptcy generally leads to a discharge of unsecured debt.

A federal bankruptcy judge ruled earlier this month that a debtor that has an outstanding loan on a vehicle must now either reaffirm the debt or redeem the vehicle in a chapter 7 bankruptcy to retain the vehicle. The case did not arise in Ohio, but in Delaware.

The judge determined that the bankruptcy overhaul in 2005 eliminated the so-called "ride-through" option in a chapter 7 bankruptcy. Under the ride-through option, a person can generally keep the vehicle that has outstanding debt by keeping current on the loan payments under the contract with the lender.

Creditors prefer that the debt be reaffirmed, especially if the principle on the debt is high or exceeds the value of the vehicle. A reaffirmation agreement in a bankruptcy case exempts the debt from the bankruptcy and is therefore not discharged by the bankruptcy court. The legal obligation to pay remains after a bankruptcy discharge.

The bankruptcy judge in Delaware found that the 2005 changes to the bankruptcy code added a section to Chapter 7 bankruptcy requiring debtors to redeem or reaffirm the debt within 45 days after the first meeting of creditors in the case. If the debtor fails to do so, the bankruptcy stay will be terminated vehicle, allowing the creditor to proceed with repossession of the vehicle.

The judge determined that the new provision means the debtor has to do more than just state an intention to continue making payments under the so-called "ride-through" option.

Source: Westlaw News & Insight, "Bankruptcy reform eliminated 'ride-through' for vehicles, judge says," 11 Jan 2011

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