Cars and Bankruptcy
Can you keep your car and file for bankruptcy? For many consumers, this is an important issue. After all, there is no sense in discharging debt if you don’t have a car to get to work. Below are some important points to consider regarding cars and bankruptcy:
How Much Equity Do You Have in Your Car?
1. How much “equity” do you have in your car? Equity is calculated by subtracting the loan balance from the car’s value (for many people this will be a negative number). A car, or any other asset, is only subject to sale 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. For example, 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 your 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, but it all hinges on the value of the car. The less expensive, the less likely it will be vulnerable to sale.
Reaffirmation May be Required
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. In some cases, debtors can negotiate better terms, such as a lower interest rate, when they reaffirm their car loan. By signing a reaffirmation agreement, you are reinstating your personal guarantee on the loan and agreeing to pay the debt after the 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.
Redeeming a Car in Chapter 7 Bankruptcy
In addition to reaffirming and continuing with payments on the loan, debtors in chapter 7 bankruptcy also have the option of re-deeming their car by paying its current cash value. How does this work? Is your car is only worth $5000 but you owe $15,000, you have the option of paying your car lender $5000 after which you will own the car free and clear. In essence, you are buying out the car for its actual value. This is an attractive option for consumers who find themselves severely underwater on their automobile but wish to keep it as a means of transportation to get to and from work. In the event that you do not have the cash necessary to buy out the loan, there are lenders who offer 722 loans for chapter 7 debtors who wish to redeem an automobile.
Cramming Down a Car 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. For example, if your car is worth $15,000 but you $25,000, 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.
Car leases, like any other executory contract, can either be assumed or rejected and surrendered in bankruptcy. If you assume the lease, you will continue making normal monthly payments as scheduled, whereas if you decide to surrender the car, you have no further obligation for the lease.
Once you file for bankruptcy, a court ordered injunction, known as the automatic stay, will prevent a creditor from repossessing your car. If your car has already been repossessed, your bankruptcy attorney may be able to negotiate its return. Another option is chapter 13 bankruptcy which allows for payment of past due car payments over a manageable period of time. If your past due car payments are included in your chapter 13 plan, it will be possible to force your lender to return your car.
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