Three important points to consider regarding cars and bankruptcy:

1. How much “equity” do you have in your car? As we’ve discussed on previous posts, a car or any other asset is only subject to liquidation in chapter 7 bankruptcy if there is non-exempt equity. Every state allows debtors to protect a certain amount of equity in their car and property. North Carolina allows $3,500 of equity in a car to be exempted from creditor’s claims. If you have less than $3,500 of equity in your car or like most people owe more than the car is worth, you can keep the car through the bankruptcy process. Problems can arise for those who have paid cash for their car as the lack of financing can leave the car exposed to sale at auction by the trustee. If you have questions, consult an attorney.

2. If you do have a loan on your car, most states will require that you “reaffirm” the debt if you wish to keep the car. What does this mean? Filing for bankruptcy erases your personal obligation to pay debts. Personal guarantees are wiped away unless they are reaffirmed. Reaffirming a debt is akin to renewing your “marriage vows” with your lender. You are reinstating your personal guarantee on the loan and agreeing to pay the debt after the bankruptcy. With no reaffirmation agreement, your lender would only be able to take your car back if you fell behind on payments after your bankruptcy. With the reaffirmation agreement, they will also be able to look to your personal assets as well if you can’t make payments. If you cannot afford to keep up with your car payments, you do have the option of surrendering the car with no continuing obligation on the loan.

3. If you bought your car more than 910 days ago, and owe more than the car is worth, you have the option of “cramming down” the car loan in chapter 13 bankruptcy  by stripping off the amount of the loan that exceeds the value of the car. If your car is worth $15,000 but you owe, and are making payments on a $25,000 loan, the $10,000 that exceeds the car’s value can be paid out at much less than 100% over the life of a chapter 13 plan. After all this legal jargon, the practical effect is to reduce your monthly car payments. In chapter 11 bankruptcy, you can always cram down your car loan, no matter when you bought the car.

The treatment of cars in bankruptcy can be complicated, if you have questions, consult an attorney.