Cars in Bankruptcy
Reaffirm Secured Debts – Keep Your Car and Other Assets
It is important to remember that Chapter 7 bankruptcy helps eliminate unsecured debts. Secured debts are not eliminated. An example of a secure debt is a car loan, meaning if you plan to discharge your car loan, you must give the car back as well.
However, it is possible to keep your car, or other assets that serve as security for a debt, by negotiating a reaffirmation agreement with your creditors in Chapter 7 bankruptcy. If your creditors are willing to reaffirm your debt, you are making a commitment to continue making the payments on the loan, for the right to keep the property you are paying for.
If I file for bankruptcy, what happens to my car?
Generally, you can protect your car from liquidation using the allowable bankruptcy code exemptions. Certain exemptions allow you to file for bankruptcy relief and protect some of your property. The courts understand that a car is necessary to get to work, or pick your children up from school. Unless you are driving a classic antique automobile, you will most likely be able to keep your car.
Most states let debtors elect the bankruptcy code exemptions they prefer. In such states, debtors have a choice between federal exemptions, and those their particular state allows. The states that do not offer this option allow only state exemptions to the debtor. Because exemption laws vary by state, it is important to consult an experienced bankruptcy attorney in your area; they can provide you with the necessary information you need when considering the exemptions available to you.
You must also know whether or not you have a clear title to your car. If you have used your car as collateral for a debt, or if you are leasing/financing your vehicle, you have three options for secured car loans when you file Chapter 7 bankruptcy.
Automobile Loans in Chapter 7 Bankruptcy
Reaffirm: When you agree with your creditor to pay the balance you owe on your car despite the bankruptcy filing, it is known as a reaffirmation contract. This contract states that you will continue to make the payments on your car, and your creditor promises they will not repossess your car, or take it back, so long as you continue to make the monthly payments.
These debts are not discharged, and they survive the bankruptcy. If you fail to make your car payments once you reaffirm your car loan, the lender can repossess the car and sue your for the balance you owe. If they repossess the car it is sold at auction; they generally do not make enough money from an auto auction to pay off your loan resulting in a "deficiency", and leaving you legally obligated to pay the balance remaining. Reaffirming your car loan is a big decision. If you don't have the money to pay for it monthly, don't do it.
You are not required by the Bankruptcy Code or other state or federal law to reaffirm your car loan. It is strictly voluntary. Speak with a bankruptcy attorney before entering into such an agreement to assure that it is best for you and your situation.
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Redeem: You have the right to purchase your car from the creditor by paying a lump sum amount that is equal to the car's fair market value when you file for Chapter 7. As stated in the 2005 Bankruptcy Code, you must pay the creditor the replacement retail cost of the automobile. The balance of the debt will then be discharged. Consider you own a car worth $5000.00, but you still owe $10,000.00 to the financing company - by paying your creditor a lump sum of $5000.00, the rest of what you owe on the car will be discharged in bankruptcy. Let a local bankruptcy attorney educate you about the benefits of redeeming your car, and find lenders that will provide the funds for you to do so.
Surrender: If you know that you owe more than the car is worth, or if you are sure you cannot afford the monthly payments, you can unload your car and its debt in your Chapter 7 bankruptcy by giving the car back to the creditor.
Leasing a Car in Chapter 7 Bankruptcy
You can either continue making the monthly payments on your car, or surrender it back to the creditor if you are leasing a car when you file for Chapter 7 bankruptcy. If you do give the car back, any obligation under the lease is eradicated, and you will no longer owe the creditor.
Auto Loans in Chapter 13 Bankruptcy
Chapter 13 bankruptcy can be very helpful when it comes to protecting your car from repossession. If you have fallen behind and are facing a possible reposession, filing Chapter 13 bankruptcy will stop the process. The amount you have to pay for the car then depends upon when you bought the car.
910 Claims: You are obligated to repay the entire loan on a car you purchased within 910 days of filing for bankruptcy. The interest rate you pay on your car may be reduced significanty. Debtors wishing to keep their cars must pay the full amount they borrowed rather than being able to "cram down" the debt to value of the car.
Cram Down: In the event you bought your car more than 910 days before you file for bankruptcy, you will only be responsible for the present value of the car. You will have three to five years to repay it, as outlined in the terms of your Chapter 13 repayment plan.
Automobile Leases in Chapter 13 Bankruptcy
The repayment plan you devise with your bankruptcy trustee during the Chapter 13 process does not include your car lease. You have two options: you can "assume" the lease and continue making monthly payments, or you can "reject" the lease and surrender the car to the creditor. If you reject the lease, the creditor will sell the leased car, apply the proceeds to your balance and then file a claim in your Chapter 13 case for lease deficiency. However, the deficiency is considered an unsecured, non-priority claim and you will likely end up paying the creditor pennies on the dollar.
Schedule a free consultation if you still have questions about how your car will be affected if you file Chapter 7 or 13 bankruptcy.