Filing for Chapter 7 bankruptcy protection can keep aggressive creditors at bay, but if you are behind on car payments, can it protect you from the loss of your vehicle? The answer to this question is: temporarily, yes. Permanently?….it depends.
Chapter 7 places a temporary stay on all creditor activity, preventing immediate repossession of your car or truck. But, if you are in default on your vehicle loan, the creditor can file a motion asking the court for permission to proceed with repossession action. At that point, you have a limited amount of time to oppose the motion and seek a repossession alternative.
There are a number of ways this situation can play out. You may ultimately decide it is best to let your vehicle go, surrendering it to the lender. In that case, you would be released from all responsibility for the loan or lease. But there are other options which allow you to keep the vehicle…
Avoiding Repossession in Chapter 7
Bankruptcy filers have a little time to work on a strategy for maintaining possession of their vehicle. Common actions include:
Curing the default – If you have missed a few loan payments or let your insurance policy lapse, you may be able to catch up the payments or renew coverage to avoid repossession.
Paying lump sum current value– You have the right to purchase the car at its current market (redemption) value, which is often much less than the cost of your monthly loan payments. For example, you may have $8,000 left in payments on a car with a present market value of $5,000. If you have access to $5,000, you could buy the car outright and own it free and clear.
Enter into a new contract – You may be able to negotiate a reaffirmation agreement to continue making payments, potentially rolling missed payments into the balance due. The loan terms may remain the same, but they can be negotiated to obtain a better deal, i.e., a lower interest rate or reduced principle.
About Reaffirmation Agreements
If you have been delinquent on your loan payments, executing a legal reaffirmation agreement is important. Without it, a lender may agree to allow you to continue making payments, but they will retain the right to repossess your vehicle at any time, without warning.
The creditor is not obligated to renegotiate or modify your payments once you have fallen behind. But, because vehicle repossession is costly, many banks are pleased to negotiate rather than see you give up your car. The lender may agree to more favorable terms, so you end up with a more affordable loan in line with your vehicle’s actual value.
Reaffirmation agreements must be approved by a judge, and, in some cases, the judge may decline to do this. (The judge’s interest is in ensuring the debtor can keep to new agreements and avoid unmanageable payments.) However, if you have a bankruptcy attorney, his or her signature on a reaffirmation agreement brings automatic court approval.
Chapter 7 and Vehicle Equity
In a Chapter 7 action, the trustee is tasked with selling debtor property to pay creditors. If you own a vehicle outright or have a substantial amount of equity in a car with a loan, you run the risk of losing the car in the bankruptcy liquidation process.
The good news is, bankruptcy laws provide for liquidation exemptions, including a motor vehicle exemption. The amount varies by state, but the federal standard is $3,775 for a single vehicle. There is also a “wildcard” exemption that can be added to this figure, and a married couple can double each exemption.
If there is a vehicle loan, you can apply your exemption to the equity in the car (the value minus the loan balance). If the equity is greater than the bankruptcy exemption, the car may be sold. At that point, the vehicle loan would be paid off, the exemption amount returned to you, and any remainder distributed to other creditors.
Note that some trustees will allow Chapter 7 debtors to pay the difference in nonexempt equity and keep the vehicle. In these cases, the payment owed is often discounted, since vehicle sales costs are avoided.
The Bankruptcy Decision
Chapter 7 is right for some people, but others might be better served with another option, such as Chapter 13, which reorganizes rather than liquidates debt. If you are considering bankruptcy and are concerned about keeping your vehicle, be sure to have a discussion with a bankruptcy attorney first.
