Here’s the actual question from AVVO.com:

Can I refinance my car loan RIGHT BEFORE i file for a Chapter 7 BK to get a better % and shorter loan terms?
Would refinancing my vehicle RIGHT BEFORE i file for bankruptcy (Cht 7) cause any issues since i intend to keep and reaffirm that debt? Is there a time period that must elapse after refinancing before i can file for bankruptcy for a debt that I want to reaffirm? Would that refinance completely remove the Security obligation under the cross-collaterization clause (between my 2 accounts) with my credit union that currently ties my car as security to a $9000 line of credit account (that i want to have discharged in a Chapter 7 BK)–otherwise both accounts would have to be reaffirmed if i wanted to keep my vehicle?

My Answer:

There are a few issues that you need to discuss with a bankruptcy attorney before trying to refinance your car loan. You need to review whether a new loan right before bankruptcy will create problems of “good faith” in your case. Getting more debt, or a new debt, right before filing can create problems.

Also, as other attorneys mentioned, the credit union probably won’t release the title to the car without paying all loans you have with them. It is common for credit unions in Illinois to add the “cross-collateralization” clause, which says something to the effect of “any security pledged on this loan is also collateral for all other loans, past or present, with us”. The credit unions take these cross-collateralized loans so they have better protection from default. They are not likely to give that up so easily. You need to speak with an experienced bankruptcy attorney to develop a complete plan of action before trying to refinance.

Usually, in a Chapter 7 Bankruptcy, people who owe a credit union on a vehicle have to choose between keeping the vehicle and paying for all loans and credit cards outstanding with the credit union, or just giving the vehicle up and not paying for any of the debt to the credit union. If too much is owed combined on all the debts, it makes more sense just to give up the vehicle and get a new loan for a lot less money on a different vehicle.

It’s very important to consult with an experienced bankruptcy attorney to review all of your options.

Daniel J. Winter
BankruptcyLawChicago.com
djw@DWinterLaw.com
312-789-9999
Offices in Chicago, Gurnee, Oak Lawn, and Skokie, Illinois