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What happens to my car if I file
bankruptcy?
There are several issues to consider in answering this question.
The most important issue is the value of your car. In most cases,
you can protect your car using the allowable bankruptcy code exemptions.
An exemption allows you to file
for bankruptcy relief and protect some of your property. The
bankruptcy courts understand you need a car to get to work and to
pick your kids up from school. So long as you aren't driving an
antique classic car, you will likely be able to keep your car.
Many states allow debtors to elect the bankruptcy
code exemptions. In those states, debtors get their choice between
the federal exemptions and those in the law of their state. For
the balance of the states, only the state exemptions can be selected.
The exemption laws vary greatly from state to state. You need to
consult a seasoned bankruptcy lawyer for the list of exemptions
available to you. The next question is whether you have clear title
to your car. If you have pledged your vehicle as security for a
debt, or if you are financing or leasing a vehicle, you have three
options for secured car loans when you file Chapter 7 bankruptcy.
Car Loans in Chapter 7 Bankruptcy
Reaffirm
A reaffirmation agreement is a contract between you and the car
creditor in which you agree to pay the balance owed on your car
note, despite the bankruptcy filing. You continue to make payments,
and the creditor promises that, as long as payments are made, the
creditor will not repossess
or take back the property.
Reaffirmed debts are not discharged, and the debt
survives the bankruptcy. If you do not make your car payments after
you reaffirm the car loan, the car lender can repossess the car
and sue you for the deficiency balance. After the finance company
repossesses the car, they will sell the car at the auto auction.
Usually the finance company does not get enough money from the auction
to pay off your loan. This shortfall is called a "deficiency,"
and you would still be legally obligated to pay the creditor the
deficiency balance. As you can see, the decision to reaffirm your
car loan is a serious financial matter.
Reaffirmation agreements are strictly voluntary.
You are not required by the Bankruptcy Code or other state or federal
law to reaffirm your car loan. Before entering into such an agreement,
you will want to speak to a bankruptcy attorney to make sure that
the reaffirmation is in your best interest.
Redeem
In Chapter 7, you have the right to purchase or redeem your car
from the creditor by making a lump sum payment equal to the car's
fair market value. The 2005 bankruptcy code provides that you must
pay the creditor the replacement retail cost of the car. The balance
of the debt will be discharged. For example, assume you own a car
worth $5000.00, but owe the finance company $10,000.00. In this
circumstance, you could redeem the vehicle by paying the creditor
$5000.00, and the remaining balance will be discharged in your bankruptcy.
A local bankruptcy attorney can advise you on the benefits of redeeming
your financed car and identifying lenders that will provide the
funds for your vehicle redemption.
Surrender
If you cannot afford the monthly payments on your car loan, or if
you determine that you owe more than the car is worth, you can unload
the car and the debt in your Chapter 7 bankruptcy by surrendering
the vehicle to the creditor.
Car Leases in Chapter 7 Bankruptcy
If you are leasing your car when you file Chapter 7 bankruptcy,
you can choose to either continue making the monthly lease payments,
or surrender the car back to the creditor. If you surrender the
leased car, any obligation under the lease will be eliminated in
your Chapter 7 bankruptcy case.
Car Loans in Chapter 13 Bankruptcy
Chapter 13 bankruptcy is powerful tool to protect your car from
repossession. If you have fallen behind on your car payments, you
can file a Chapter 13 bankruptcy to stop the repossession of your
vehicle. The amount you have to pay for your car depends upon when
you bought your car.
910 Claims
If you bought your vehicle within 910 days of filing your bankruptcy
case, you must repay the entire car loan. The good news is
that the interest rate you pay on your car loan may be significantly
reduced. For example, if you owed $10,000 on a car loan whose blue
book value was only $5000, you would be required to pay the entire
$10,000 balance if the car was purchased less than 30 months, or
910 days, of filing. In short, debtors who want to keep their cars
must pay the full loan amount rather than "cram down"
the debt to the value of the car.
Cram Down
If you bought your car more than 910 days before you file bankruptcy,
you will only have to repay an amount equal to the present value
of the car. For example, if you owed $5000 on a car that is worth
only $2500, upon filing Chapter 13 you would be required to repay
the finance company only $2500 over the three to five year term
of your Chapter 13 repayment plan.
Car Leases in Chapter 13 Bankruptcy
You car lease cannot be paid through the Chapter 13 bankruptcy repayment
plan that you devise with your bankruptcy attorney. You can "assume"
the lease and continue making the monthly payments. You can "reject"
the lease and return the car to the creditor. The creditor will
sell the leased vehicle, apply the sale proceeds to your lease balance
and then file a claim in your Chapter 13 bankruptcy case for the
lease deficiency. This deficiency is an unsecured, non-priority
claim, which means you will likely only pay that creditor pennies
on the dollar.
Author: TotalBankruptcy.com
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