One of the major concerns for people considering bankruptcy is how the bankruptcy will affect their car — not only the car loan but the car as a potential asset. In this article, we’ll discuss the interplay of cars and bankruptcy.
Can I Keep My Car in Chapter 7?
The short answer is usually “Yes!”. The two common situations to consider are: 1) If you have a car loan, how does bankruptcy effect this loan?; and, 2) If you have equity in your vehicle, how does this interplay with bankruptcy?
Two scenarios follow:
- A. Reaffirming The Car Loan
If you own a car with a car loan, bankruptcy law will allow you to reaffirm this loan. In other words, the debt would not be subject to discharge and would remain active on your credit report. Reaffirming a debt requires signing a reaffirmation agreement with the lender, and the lender would file this reaffirmation agreement with the Bankruptcy Court. So long as you continue making payments on the car, you can continue to keep the car. The disadvantage is that if you cannot make payments on the car and you reaffirmed the debt, you will default on your loan and the lender may obtain a deficiency judgment against you. For this very reason, it is also very important to consider the ramifications of reaffirming a car loan, especially one for a car that is upside down or where the loan has a high interest rate.
- B. Equity in Your Car
Alternatively, let’s say you have equity in the car, meaning the car is worth more than the loan against the car, or maybe the car is owned outright. This is considered an asset of the bankruptcy, but we have exemptions, or laws, that protect this asset. Not only do we have a vehicle exemption, but we also have a very generous wildcard exemption to protect the car. If there is too much equity in the car, after applying all exemptions, there are two options: 1) pay the trustee, or person who administers your case the difference for the benefit of your creditors, or 2) file a chapter 13 bankruptcy, which would allow you to make payments to your creditors over 3-5 years, and thereby protect the vehicle. Vehicles in the vast majority of cases, however, are completely protected using exemptions and usually do not create any issues.
Chapter 7 Redemption – Another Option
Redemption: If the value of your car is worth less than the total amount you still owe, you can keep your car by “redeeming” it. For example, if the Fair Market Value of the car is $4,000, but you owe $9,000, you can redeem the car for $4,000, basically paying the value of the car. The main issue with this approach is that a person would need to be able to come up with funds to redeem the car during the bankruptcy process. Often, this is roadblock people face when considering redemption.
Chapter 13 Bankruptcy, Cramdowns, and Your Car
In Chapter 13 bankruptcy, you have other options. One option is to roll your loan into your Chapter 13 repayment plan. Payments made into the Chapter 13 bankruptcy would pay the car loan over the course of 3-5 years. This is a great tool if you are behind on your car loan and your car is subject to repossession.
You may even be able to cramdown the car loan. A Chapter 13 cramdown allows you to cramdown the auto loan to the fair market value of the car, provided that the car loan is greater than 910 days old or was refinanced. This is an extremely useful tool when the vehicle is upside down. For example, if the Fair Market Value of your car is $10,000, yet you owe $18,000 on the loan, a cramdown would allow you to reduce the loan amount down to $10,000. The difference (or $8,000) would be unsecured debt discharged in the bankruptcy, similar in nature to other unsecured debt such as medical and credit card debt.
When is Surrendering the Car the Best Option?
In some cases, surrendering your vehicle will be the only option available to you. In other cases, surrendering your car is better than continuing to make payments on it, even at a reduced rate. Determining which choice is best for your situation requires the aid of a skilled bankruptcy attorney. Car loans are fairly easy to obtain after bankruptcy, and even during bankruptcy. The main issue is that the interest rates on the loan tend to be rather steep.
How a Eugene, OR Bankruptcy Attorney Can Help
Butcher Law Office, LLC provides bankruptcy services to Lane County, OR residents who are struggling with their current finances. If you’re afraid that you are going to lose your car if you file for bankruptcy, Tom will review the terms of your loan, your finances, and go over your goals with you to figure out some way, if possible, to hold onto your primary transportation. For more information on how we can help, please give us a call or talk to us online to schedule your free hour-long consultation.