Can I keep my car if I file Chapter 11? One study found that people filing for bankruptcy are more concerned about keeping their car than keeping their house. For many individuals facing financial trouble, their car is crucial for their survival.
The good news is that the bankruptcy system allows people to retain their cars even after filing for bankruptcy. Some individuals file for bankruptcy specifically to safeguard their vehicles.
According to a report by the Consumer Bankruptcy Project, many people would rather default on their mortgage than risk losing their vehicle. Fortunately, the bankruptcy law permits them to keep their cars. Chapter 7 bankruptcy is the most popular among the various options available to individuals. Since they do not own many assets, they can retain their car.
Chapter 7 filers have the option to “reaffirm their loan” or purchase the vehicle outright. In the case of Chapter 13 bankruptcy, individuals can continue making payments on their car loans and other debts through a structured payment plan. Both chapters involve several steps for those who wish to retain their vehicles.
Filing Bankruptcy When You Own the Car
Car loans are secured loans, meaning your lender has the legal right to repossess them if payments fall behind. When filing for Chapter 7 bankruptcy, all assets, including your car loan, must be listed on a Schedule A/B form as it holds value and counts as an asset. Additionally, courts require filing a Statement of Intention form 108 which informs them whether you want to reaffirm or redeem the vehicle loan; this must happen within 30 calendar days after filing for bankruptcy otherwise your car loan will no longer be included within bankruptcy proceedings.
Those contemplating bankruptcy must first assess their car, taking steps depending on its specific status such as loan payments, leasing agreements, or ownership outright. Your actions for keeping it may depend on this status.
If your monthly car payments include lease or financing payments, your car could either be leased or financed depending on its contract terms. Leasing implies renting the vehicle and may impose mileage restrictions that result in additional charges at the lease end.
If you take out a loan and make monthly payments, your lender holds onto the title as collateral until all loan debt has been repaid in full. Once this occurs, ownership of the vehicle passes back over to you; if not, they have every right to repossess it from you and sell it at auction.
If your car was not paid off in full before filing bankruptcy, its chances of survival under either Chapter 7 or 13 bankruptcy may decrease significantly.
Even if you own your vehicle “free-and-clear,” its value must still be considered when filing bankruptcy. Vehicle valuation will have an important bearing on proceedings.
How Much Is Your Car Worth?
It also plays a role in determining your payment plan under Chapter 13 bankruptcy. The value of your car is a crucial factor in establishing the payment plan for Chapter 13 bankruptcy. As it’s important to keep in mind, the value of a car doesn’t depend on its original purchase price or even what you paid over time, each state has different regulations regarding valuation methods; often using “retail replacement price” or ACV (Actual Cash Value). This value takes into account factors like make, year, mileage, and condition when calculating value; to get an idea of your car’s worth consult sources like Edmunds or Kelley Blue Book which provide estimates of car values.
In bankruptcy court, individuals filing Chapter 7 can claim an exemption amount for their car and other possessions when filing. This exemption varies by state and is revised every three years at a federal level; 31 states also offer bankruptcy exemption amounts that can differ from that of federal bankruptcy law. If your car’s value falls within this exemption range, then keep it. Otherwise, it could be sold off by the trustee to pay off the debt; the exemption will remain intact while the remaining debts will be discharged.
If your vehicle is valued at $8,000, however, you could receive $6,000 towards buying another vehicle while any remaining funds will go toward paying off any unsecured debts.
Individuals filing for bankruptcy have the option of using wildcard exemptions for items not falling within specific exemption categories.
The wildcard exemption amount is set at $12,575. Often, this wildcard exemption can cover the value of a car that would not otherwise be exempt. According to the CBP study, individuals declaring Chapter 7 bankruptcy usually owe money for older cars with little value.
In Chapter 7 bankruptcy, Schedule C is used to list the property that is legally exempt and can be retained. This information may also appear in Schedule A/B under assets. It is crucial to accurately describe the property in both schedules to avoid confusion, as the bankruptcy process can be complex.
Due to the intricacies involved, it is advisable to consult an attorney for assistance with understanding exemptions, retaining your vehicle, and navigating the rest of the bankruptcy process.
Filing Bankruptcy When You Don’t Own the Car
When filing for bankruptcy while still making car loan payments, the equity in your vehicle becomes a crucial factor. Equity refers to the difference between the amount you owe on the car loan and the current value of the car. For instance, if your car is currently valued at $9,000 and you still owe $4,000 on the loan, your equity would be $5,000. In other words, if you were to sell the car, you would receive $5,000.
Whether you can keep the vehicle or not depends on your state’s exemption limit. If the equity in your car is below the state exemption limit, you can retain the vehicle. However, if the equity exceeds the exemption limit, the bankruptcy trustee may sell the car and utilize the proceeds to pay off unsecured debt. This situation would enable you to purchase a vehicle worth up to the exemption limit, which in this case would be $6,000.
It’s important to note that as you own the car for a longer period and make more payments towards it, the chances of surpassing the exemption limit increase. Unlike fine wines that appreciate, cars generally depreciate rapidly. Therefore, the older the car, the lower its value is likely to be.
Redeeming the Car’s Current Replacement Value
Even if the value of your vehicle exceeds the exemption limit, you can still retain it when filing for Chapter 7 bankruptcy. In such cases, you have the option to “redeem” the vehicle by paying the lender the difference between the current replacement value and the amount you owe on the loan. Once this payment is made, you become the outright owner of the vehicle.
However, it’s worth noting that the majority of individuals filing for bankruptcy do not have sufficient funds to pursue the redemption process for their car. This route is chosen by less than 2% of people in bankruptcy cases.
Making a Reaffirmation Agreement to Keep Your Car
Reaffirming the debt is an alternative method to retain your vehicle when filing for bankruptcy. This involves entering into a new repayment plan with the lender. On Form 108 (the statement of intent), approximately two-thirds of individuals indicate their intention to utilize this option.
Reaffirming the debt provides reassurance to the lender that you will continue making payments on the loan. Bankruptcy proceedings prompt creditors and the bankruptcy courts to emphasize the importance of ensuring your ability to fulfill future obligations. They maintain strict criteria. If you have an attorney, your bankruptcy attorney must approve the reaffirmation plan, which lenders must also agree to. If you do not have an attorney, the reaffirmation agreement should be submitted along with your bankruptcy documents. The bankruptcy court will then conduct a hearing to determine whether you can afford the car payments.
Once the reaffirmation has been approved, it is crucial to continue making the agreed-upon payments. After receiving a Chapter 7 bankruptcy discharge, you cannot file for another bankruptcy of the same kind until eight years have passed. Therefore, if you become unable to make payments on the car, this option will no longer be available to you.
Surrendering Your Car
When completing the Statement of Intent during bankruptcy filing, you can surrender your vehicle. However, it is essential to note that most individuals declaring bankruptcy prefer to retain their cars. Vehicle surrender typically occurs when a person is significantly behind on their payments. In such cases, the lender will repossess the vehicle, and you will not be held responsible for any remaining debts related to it. On the other hand, if you voluntarily surrender your car outside of bankruptcy, you may be required to pay the “deficiency balance.”
It’s worth mentioning that the “Automatic Stay” provision in bankruptcy puts a halt to repossession actions that were initiated before you filed for bankruptcy. As long as you pay your bankruptcy fees and submit the required paperwork within the designated timeframe, you can still reaffirm the car loan even if the lender has already sold the vehicle.
Keeping the Car Outside of Bankruptcy
The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act prohibited “drive-through” car loans in bankruptcies. Before this act, car lenders and consumers could disregard bankruptcy laws to maintain their loan agreements. Although such practices are deemed illegal under bankruptcy laws, they still occur, and courts seldom have the means to enforce them. If no intention is expressed to reaffirm or redeem the car by the deadline, a car loan will be excluded from the bankruptcy proceedings. However, courts rarely enforce this provision since car owners and lenders continue to conduct business. It is important to note that this option, which goes against bankruptcy law, offers less protection and is not advisable to pursue.
Keeping Your Car, Chapter 7 vs. Chapter 13
The CBP car bankruptcy study reveals that individuals who file for bankruptcy tend to have cars that are less valuable than those owned by the average consumer, but they also possess more wealth in their vehicles. The study conducted by CBP confirms this observation, stating that “people come to bankruptcy court when their wealth is depleted, and the data support the intuition that they will hold on to their means of transportation if possible.”
Furthermore, the study indicates that Chapter 13 bankruptcy provides a better chance of keeping one’s car compared to Chapter 7 bankruptcy.
The Challenges of Chapter 7 Bankruptcy
Chapter 7 bankruptcy entails liquidating assets to repay unsecured loans, making it challenging to retain your vehicle even with the car exclusion provision. Declaring Chapter 7 bankruptcy can also make it difficult to obtain or retain a car. Falling behind on payments may result in being unable to file for bankruptcy again for eight years. It is crucial to make timely payments, or else the car may be lost. Additionally, Chapter 7 bankruptcy remains on your credit report and affects your credit score for ten years, making it challenging to secure a car loan until you rebuild your credit.
Advantages of Chapter 13 Bankruptcy
In contrast, Chapter 13 bankruptcy establishes a repayment plan based on your income and assets, to preserve what you have. Upon successful completion of the plan, unsecured debts are discharged. This option is particularly beneficial for individuals with a significant amount of equity in their cars. However, it is important to note that this equity is included as part of your overall wealth, which forms the basis of your repayment plan. The plan also involves catching up on missed payments.
Under Chapter 13 rules, if you own your vehicle outright, you can keep it. The bankruptcy court has the authority to compel a lender to reduce the interest rate on a car loan, leading to lower monthly payments. Furthermore, if you have owned your car for over 910 days (approximately two and a quarter years), the amount owed will be based on the vehicle’s value rather than the original loan. However, the court must agree to the repayment terms set by the car loan lender.
Given the complexity of bankruptcy proceedings, it may be beneficial to hire an attorney who can guide you through each stage and help identify which chapter would best fit your situation.
Foohey mentions that on average, Chapter 7 bankruptcy costs over $1,500, while Chapter 13 bankruptcy costs approximately $3,300. If someone is struggling to make their auto loan payments and intends to file for bankruptcy solely to address that specific loan, bankruptcy may not be the optimal choice. It may be more cost-effective to sell the car, settle any outstanding balance on the loan, and start afresh with a new vehicle and auto loan.
Bankruptcy Assistance with Bruner Wright
If you’re overwhelmed by debt and unsure of your options, it’s time to take action. Bruner Wright, P.A., with decades of experience in bankruptcy law, can guide you through the complexities of Chapter 7 and Chapter 13 proceedings. Our goal is to help you maintain your assets, including your vehicle, and chart a path towards financial freedom. Don’t let the stress of financial uncertainty take over your life. Reach out to Bruner Wright, P.A. today for a free consultation and start your journey towards a more secure financial future.
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