Tag Archives: secured debt

How To Keep Your Car in a Chapter 7 Bankruptcy

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Chapter 7 bankruptcy gives you a couple of options for your car when you’re still paying on it. Basically, you can either keep paying or you can surrender (i.e., give back) the vehicle.

What’s The Situation?

This is about a vehicle that you still owe on, where your finance company is the lienholder on your vehicle title, and where there’s no more equity (value beyond the debt) than is covered by your available exemptions. In other words, this is not a vehicle that your Chapter 7 trustee is going to be interested in, either because it has no equity (e.g., it’s worth less than the debt against it) or because the equity is small enough to be protected by the exemption. The following options also apply to car leases.

Ch. 7 Options For Your Car

Even if the bankruptcy trustee doesn’t want your car, your car finance company might. But if you need to keep the car, especially for work, there is a certain path that you need to follow.

How To Keep Your Car in a Chapter 7 Bankruptcy

  1. First, if you don’t want to keep your vehicle, you can surrender it to the creditor after your bankruptcy is filed. (Or you can surrender it before you file, but that gets risky—be sure you have talked to your bankruptcy attorney and have a clear game plan beforehand.) If you give back your vehicle without bankruptcy, you’ll owe and you might be sued for the “deficiency balance”—the amount you would owe after your vehicle is sold, its sale price is credited to your account, and all the repo and other costs are added. (The deficiency balance you’ll owe can be crazy high.) But bankruptcy will write off (i.e., discharge) the deficiency balance.
  2. If you want to keep your car through a Ch. 7, you have to be current on your loan. In other words, make your car payments during bankruptcy. So if you aren’t current, you’ll need to quickly get current and stay there. Some lenders will allow you to be a month or so behind on your loan, but I’ve found that when a bankruptcy has been filed, they suddenly change their tune and they want to you be current on your payments. Depending on the lender, you might need to sign a reaffirmation agreeing to legally exclude the vehicle loan from the bankruptcy discharge, but most lenders don’t work that way. I generally don’t recommend a reaffirmation agreement except under certain narrow circumstances. You should discuss this issue with an experienced bankruptcy attorney before your bankruptcy is filed.

The Takeaway

In general, “straight bankruptcy”—Chapter 7—can be the best way to go if your vehicle situation is pretty straightforward: you either want to give back your car, or you want to keep the car and you’re current on the loan or can quickly get current.

If you have questions about how to keep your car in a Chapter 7 bankruptcy  – or about how to get rid of it – schedule an appointment with Bankruptcy Attorney Jennifer N. Weil, Esq. by calling 201-676-0722. Or you can schedule your own appointment online at my Setmore page.

 

Are you eligible for Ch. 7 or Ch. 13 bankruptcy?

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Eligibility for Ch. 7 or Ch. 13 bankruptcy can turn on who is filing the bankruptcy, the type and amount of debt, the amount of income, and the amount of expenses.

Who is filing the bankruptcy:

Only a human being (or a human being and his or her spouse) can file a Chapter 13 case. Neither a partnership nor a corporation can file a Chapter 13 case, but it can file a Chapter 7, whether or not the business owner also files one individually.

The type and amount of debt:

If your debt is primarily consumer debt (a dollar amount of more than 50%), then you have to pass the means test to qualify for a Chapter 7. Under Chapter 7, there is no restriction on the amount of debt you can have in order to qualify. But, Chapter 13 is restricted to cases where the person filing has a maximum of $383,175 in total unsecured debt and $1,149,525 in total secured debt.

Amount of income:

If your income is no more than the median income for your family size and state, then you can easily pass the means test to qualify for a Ch. 7. Chapter 13 requires regular income, which the Bankruptcy Code defines as income that is “sufficiently stable and regular” to enable you to “make payments under a [Chapter 13] plan.” This makes sense because you will be making regular monthly payments for the duration of your Ch. 13 case. A Ch. 13 case will last three years if the income is less than the median income applicable to your family size and state; if the income is at the applicable median income amount or more, the Ch. 13 case will last five years.

The amount of expenses:

In Ch. 7, if your income is not below the median for your state, then you must complete a highly technical test involving some, but not necessarily all, of your expenses to see whether you pass the means test and thus whether you are eligible for a Ch. 7. In Ch. 13, a similar, but often more complicated, calculation largely determines the amount you must pay monthly into your plan to satisfy the requirements of Ch. 13.

Choosing between Ch. 7 and 13 can be simple. But there are at least a dozen major differences among them, differences of which you may not be aware. So when you come in to see me or another attorney, be clear about your goals but also be open-minded about how to reach them. You may well have tools available that you didn’t know about.

For bankruptcy in Northern New Jersey, call: (201) 676-0722 or schedule a consultation at my Setmore page.

Options with Your Vehicle Loan under Chapter 7

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Your car loan may be your most important debt. Chapter 7 gives you the control you need to handle it.

When you think about secured debts—those tied to collateral like a vehicle—it helps to look at these kinds of debts as two deals in one. You made a commitment to repay the car loan and then you agreed to back up that commitment by giving the creditor certain rights to your collateral.

The first deal—to repay the money—can almost always be discharged (erased) in bankruptcy. But the second deal—the rights in the collateral that the creditor has, known as a “lien” on the vehicle title—is not affected by your bankruptcy. So, you can wipe out the debt, but the creditor stays on the title and can get your vehicle if you stop paying. Your options in Chapter 7, and the creditor’s options, are tied to these two realities.

Keep or Surrender?

As long as you file your Chapter 7 case before your vehicle gets repossessed, the ball is in your court regarding whether to keep or surrender it.

Surrender the Vehicle

In most situations, if you want to surrender the vehicle, then a Chapter 7 bankruptcy is the time to do it. That’s because in the vast majority of vehicle loans, you would still owe part of the debt after the surrender— the “deficiency balance”—often a shockingly large amount. The reason for the large deficiency balance is because you usually owe more than the vehicle is worth, but also because the contract lets the creditor charge you for its repossession and resale costs. Surrendering your vehicle during your Chapter 7 case allows you to discharge that whole debt and not owe your lender any of those costs.

There is a theoretical possibility that the vehicle loan creditor could challenge your discharge of the “deficiency balance,” based on fraud or misrepresentation when you entered into the loan. These are rare, especially with vehicle loans.

Keep It

Whether you are current on the loan payments does not matter if you are surrendering the vehicle. But if you want to keep it, whether you are current and if not, how far behind you are, makes a big difference.

Keep the Vehicle When Current

As you can guess, it’s best if you are current on your car payments. Then you would just keep making the payments on time and you might sign a “reaffirmation agreement” to exclude the vehicle loan from the discharge of debts at the end of your Chapter 7 case. But whether you would sign such an agreement depends heavily on the advice of your bankruptcy attorney, an issue you should discuss thoroughly with them.

Some vehicle loan creditors insist on a reaffirmation agreement, at the full balance of the loan—it’s a take-it-or-leave-it proposition. In that case, if you want to keep the car or truck, you need to “reaffirm” the original debt, even if by this time the debt is larger than the value of the vehicle. But reaffirmation can be dangerous because if you don’t keep up the payments, you could still end up with a repossession and a hefty debt owed—AFTER having passed up the opportunity to discharge the debt during your bankruptcy case. So be sure to understand this clearly before reaffirming, especially if the balance is already more than the vehicle is worth.

Some creditors are willing to allow you to reaffirm for less than the full balance, so that the creditor avoids taking an even bigger loss if you surrender the vehicle. Talk to your attorney whether this is a possibility in your situation.

Keep the Vehicle When Not Current

If you are not current on the vehicle loan at the time your Chapter 7 case is filed, most of the time you will have to get current quickly to be able to keep the vehicle—usually within a month or two. That’s in part because for a “reaffirmation agreement” to be enforceable, it must be filed at the bankruptcy court before the discharge order is entered. Since that happens usually about three months after the case is filed, the creditor needs to decide quickly whether you will be able to catch up on the payments and reaffirm the debt.

Some vehicle creditors may be more flexible, such as by giving you more time to cure the arrearage. Your attorney will be able to discuss this issue with your creditor, if it arises.