Bankruptcy and Cars
Keeping Your Vehicle During Chapter 7 Bankruptcy
If you own your vehicle and are not making payments you will be allowed to keep it if its value falls beneath the vehicle exemption amount for your state. If you are making payments on your car, you will need to decide whether you want to surrender the vehicle or keep it by continuing to make payments. You will inform the court of your intention by filing the Statement of Intention (SOI), as well as mailing a copy of the SOI to your vehicle lender. This holds true if you are leasing a car, as well.
If you wish to surrender your vehicle during your Chapter 7 bankruptcy, you list the lender on your SOI, stating that you intend to surrender your vehicle. This will clear you of any further liability on the debt after your bankruptcy. If you are leasing your car, you accomplish the same thing by rejecting the lease on your SOI.
If you want to keep a vehicle on which you are making payments, you must continue to make your payments as scheduled. You can either pay the lender a lump sum to purchase the car at its current value – called redemption, or enter into a new contract –called a reaffirmation agreement, which lets you keep your car under similar terms as your car’s original promissory note.
Your lender may let you keep the car without entering into a reaffirmation agreement, by allowing you to continue to make the payments under the old agreement. If the lender allows you to retain the car and pay according to the old agreement, they will still retain a lien and can repossess the car if you default on your payments. However, if the car is repossessed (or if you decide to give it back), you will not have to worry about owing a deficiency on the car since that will be expunged when your bankruptcy case is done.
Keeping Your Vehicle During Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy you are generally allowed to keep your vehicle unless there is a substantial amount of nonexempt equity in your car or if your car payment is very high. If you are behind on your car loan payments, you may be able to catch up through your Chapter 13 repayment plan.
Under Chapter 13 bankruptcy, your repayment plan must show that all of your disposable income is used to repay your unsecured debts under your plan. In determining your disposable income, you may deduct only those expenses that are reasonably necessary for the support of you and your dependants. This “reasonableness” provision might be an issue if you own a luxury car, since the court may decide that a high payment on an expensive car is not a reasonable expense. However, you may be allowed to claim an expense for a lower priced car.
If you are behind on your car loan or lease, you can keep your car if you pay the arrearage through your repayment plan and continue to make your regular car payments. As long as you stay current on your car loan and your repayment plan, the lender cannot repossess your car. When you file bankruptcy, most creditors are prohibited from continuing collection efforts against you. If you have already filed for Chapter 13 bankruptcy, the lender cannot repossess your car. If the lender repossesses your car before you file for Chapter 13, you may still be able to get it back.
If the amount of your car loan is higher than the value of your car, you may be able to reduce the amount of your loan in Chapter 13 bankruptcy. Essentially, you can reduce the amount you owe to equal the value of the car. Whatever is left becomes unsecured debt and is treated like your other unsecured debts. However, you must have bought the car at least two and a half years ago.
If you would like to speak with an experienced and compassionate bankruptcy representative from Client First Bankruptcy, call us toll-free at 800-383-6004. Call us today, sleep better tonight.