Can I Keep My Car in Bankruptcy?
Can you keep your car in bankruptcy? Yes and no; Congress has made that question difficult to answer. But the simple answer is yes, if you can afford to pay for it. Let’s break the question down into its important parts.
Your car is an asset. You must list your car or cars in the schedule of assets with your bankruptcy case. That’s part of the bankruptcy bargain; you must disclose all that you own (all of your property) as well as all that you owe if you want a bankruptcy discharge.
Your car loan is a debt. If you owe money on that car, you must also list that debt in the schedule of debts. If you can afford to pay for the car, you can keep it. But keep reading; it’s not that simple.
Chapter 7 bankruptcy. If you owe money on that car, in chapter 7 bankruptcy, the bankruptcy discharge will eliminate any unpaid balance on that debt, along with all other dischargeable debts. However, since 2005, the law allows car lenders to repossess cars simply because you file bankruptcy, unless you either reaffirm the debt or redeem the collateral. That’s right, even if you are current in your car payments, the creditor may repossess the car.
- Reaffirmation. Reaffirmation occurs if, before the court issues the chapter 7 bankruptcy discharge, you sign a new agreement (same payment terms) to pay the debt. Without that agreement, the discharge eliminates the car loan debt, but the lender’s lien remains. If you default in payments, the lender may repossess the car but cannot sue you for any unpaid balance. If you sign a reaffirmation agreement and then default in payments, the lender can both repossess the car and sue you for the unpaid balance.
- Redemption. Redemption means that you pay off the balance of the car loan, for the lesser of the unpaid balance or the replacement value of the car. That’s a really good deal if the unpaid balance of the loan is much greater than the value. The hard part is that you must pay it off in cash or with a new loan. You can often get a new loan even after filing bankruptcy, but you’ll pay 20+% interest on that loan.
In chapter 7 bankruptcy, a personal auto exemption will protect up to $5,000 of equity in your car or cars ($10,000 if you are 60+ years of age or disabled) from the bankruptcy trustee. If there’s more equity, the trustee will want you to pay him or her an amount equal to the non-exempt equity or he’ll sell the car, pay off the loan, give you the exempt amount, and keep the rest to pay your other creditors.
Chapter 13 bankruptcy. If you owe money for which your car is collateral and you want to keep the car, your chapter 13 plan must provide for payments on that loan. And, after all payments have been made on your chapter 13 plan, the bankruptcy discharge will not affect any unpaid balance on that car loan. If you want to surrender the car to the car lender, in chapter 13 bankruptcy the discharge will eliminate any unpaid balance on the loan.
Cram Down. There is also an opportunity in chapter 13 bankruptcy to pay off your car loan for less than the balance owed. Just like redemption in chapter 7 bankruptcy, if the value of the collateral is significantly less than the unpaid balance of the loan, the chapter 13 plan can provide for payment of the value of the car as part of your plan payments to the trustee. If you make all plan payments, not only will you receive a bankruptcy discharge but also a free and clear title to the car. That’s wonderful, if you finish your plan successfully. But if you default in your plan payments and convert your case to chapter 7, or allow the court to dismiss it, you will be seriously behind in your car payments on the original balance.
Cars are a complicated part of the bankruptcy bargain. Your obligation to pay as much as you can to your creditors includes allowing the car creditor certain rights to protect the value of their collateral.
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The statements of law made here are general statements of law, effective at the time published and subject to change from time to time. These statements are not intended, nor may they be construed, to be applicable to any particular set of factual circumstances nor to any particular person. I recommend that all readers seek the assistance and advice of an experienced bankruptcy lawyer for guidance in their particular circumstances.
© Copyright 2013 David C. Hoskins, licensed Colorado lawyer