To keep your car in Bankruptcy, you need to understand some basics:
State exemption laws only protect a vehicle up to a limited dollar value, and usually, the exemption only applies to one car per person filing for Bankruptcy. If your spouse doesn’t file Bankruptcy with you, you might be unable to protect that second vehicle. (For example, in Nevada, the amount of the vehicle exemption is $15,000, while in California, the vehicle exemption is only $7,500. In Utah, the vehicle exemption is $3,000) And if you own or are on the title to your children’s vehicle, that’s another potential problem to consider.
If your car is financed or has a title loan, to keep it after Bankruptcy, you must still deal with this loan, called a “secured debt.” The law offers four options to deal with vehicle loans:
- Reaffirmation: You sign paperwork that your lender sends you agreeing that your Bankruptcy will not affect this loan. A bankruptcy judge must approve any reaffirmation except for loans with Credit Unions. The hearing to see the judge to reaffirm is usually fairly quick, often about one month. Car lenders usually wish you to enter into a “reaffirmation agreement” in which you promise to pay for the car despite the Bankruptcy.
Reaffirming is usually a terrible idea because if the car gets wrecked, has serious mechanical problems, or can’t make the payments, you still must repay the car loan. As a result, if you reaffirm, the lender can sue you for the difference between the loan balance and what the car sells for at auction, which is called a deficiency.
Unless you reaffirm the loan, some lenders will repossess your car after the Bankruptcy, even if your payments to them are current. However, other lenders don’t require reaffirmation, but they will pressure you into reaffirming by falsely implying that reaffirming will improve your credit score and offer other benefits. However, most Bankruptcy judges recognize these claims as false. Your bankruptcy judge may NOT approve the reaffirmation. By doing this, you have fulfilled any obligation to the loan company to reaffirm, and the lender cannot come back to sue you later. The laws in Nevada prohibit a lender from repossessing a vehicle if the payment is current. Other states have similar laws. Still, in places where the laws don’t protect the borrower from an aggressive lender, this issue is of great concern.
On the other hand, if you are delinquent on your car payments, the lender won’t offer you a reaffirmation. Neither your lawyer, the judge, or the Trustee can force the lender to offer a reaffirmation.
- Surrender: You can voluntarily return the car and owe the lender nothing. This option is ideal when your car is in poor condition, needs expensive repairs, or the financing costs are too high based on your current financial situation.
- Pay and Drive: The “pay and drive” option keeps the current loan terms in place. As long as you pay, you can drive the car. But if you become delinquent with your payments, expect the “repo man” to take your car quickly. And if the vehicle is in an accident or has serious mechanical problems, you can walk away. The benefit of selecting “pay and drive” is the lender cannot sue you for a deficiency if the loan balance exceeds the car’s value.
- Redemption: Redemption may be the best option if you owe more on your car than it is worth. With redemption, if the difference between the loan balance and your car’s value is substantial, “redemption” allows you to pay only what the vehicle is worth instead of the balance you owe. Redemption requires applying to the court and proving the car’s value. After a successful Court hearing, a Court order lets you “buy out” the existing loan. Getting the cash to “buy off” the car loan can be problematic. But some lenders offer loans to do this and even finance the cost of your legal fees to redeem. But these lenders are picky about how old the car can be and how many miles it can have, and they require you to be represented by an attorney. Since vehicle values can fluctuate widely, when this option is available, it will save you several thousands of dollars. Although your interest rate will be substantial, the much smaller principal balance will offset that cost
But wait, there’s more to consider! Such as
What’s your car worth? Although exemption laws determine what amount of equity someone in Bankruptcy can keep, equity is the car’s value minus the balance of any loan on it. Just knowing the value of your car isn’t sufficient to determine the equity if you have a car loan. (For example, if you have a car worth $40,000 and owe $30,000 secured by the title, your equity is $10,000, not $40,000.)
The exemption laws vary widely throughout the country. So understanding these laws is critical to determining whether you can keep your vehicle and whether you must pay the bankruptcy trustee the portion of the vehicle not protected by the applicable exemption law. Exemption laws may not be straightforward, as you must live in a state for over 2 years to use their exemption laws.
If your vehicle is not fully exempt, many bankruptcy trustees will let you keep it if you pay them the difference between your equity and the exemption amount. (For example, if you have $10,000 in equity, and the exemption laws available to you are only $7,500, your unprotected equity is $2,500.) The Trustee could sell your car, give you the first $7,500, and use the remaining sale proceeds to pay some of your debts. Or they may let you pay the amount that isn’t exempt ($2,500 in this example) at 0% interest. However, you need to be able to repay whatever is required within 6 months to a year. And needless to say, if you miss any payment, there will be problems.
For an experienced bankruptcy attorney, guiding you in choosing the best way to keep your car is easy. For someone unfamiliar with the many land mines involving secured debt and how you can make the best decision. Deciding how to proceed can be a complicated and even frightening experience. What you should do to keep your car can be one of the most expensive and gut-wrenching issues in your Bankruptcy. Proceed with caution – this is a big decision.
