I have a client who filed a chapter 7 bankruptcy. He owned one vehicle with a title loan for about $700 on it. We listed the title loan in the bankruptcy and checked the box that he would reaffirm (keep) the title loan and keep paying on it.
Recently, he was in a car accident, it was the other guy’s fault, and my client received a check from the insurance company for $900. The check is written to both my client and the title loan company. They have called and demanded that he turn over the check before they will release the title, and he is trying to settle with them for less than the $700 he owes them.
The insurance company knew that it didn’t want to be in the middle of this, so they wrote the check to both parties. The title loan company won’t release the title until they receive the endorsed check, because they are not only the lienholder, but they physically hold the legal title. In this one, my client will lose. He wants to work out a deal, but although the bankruptcy discharged his personal liability on the note, the title loan company still has a valid lien for $700, and they will take $700 of that $900 check.
Bankruptcy discharges your personal liability on the secured loan, but the lender still has every right to enforce their rights against the collateral (repossession or foreclosure). If you receive an insurance check, they get to cash it and pay off their valid lien before you see any of the money.