A common concern our clients have when they are considering filing for bankruptcy is whether they can keep their vehicle. Below is a quick summary of how vehicles are treated in Chapter 7 and Chapter 13 filings:
When you file a Chapter 7 case, there are three primary options for how to handle your vehicle:
- Surrender: If you cannot afford your car payments or you no longer need it, you can voluntarily surrender it to your lender. The Chapter 7 process requires the lender to treat the surrender as payment in full because any deficiency balance that remains due on the vehicle is treated as unsecured debt, which is discharged or eliminated in your case.
- Redemption: If a debtor has sufficient funds to make a lump sum payment equal to the vehicle’s value, it can be redeemed. It is important to understand that what your car is worth is often much lower than what you owe on it. In other words, you may owe $5,000 on your car and it is worth only $4000. If you can pay the $4000 in your bankruptcy, your car loan will be considered to be paid in full and you can keep the vehicle.
- Reaffirmation: When a debtor signs a reaffirmation agreement, it is a new contract which removes the car loan from being included in the bankruptcy case. The debtor can continue to make the monthly payments and keep possession of the car. However, it is important to understand that by removing the debt from the bankruptcy, you cannot discharge any of it. If you default on your car loan payments, the creditor can proceed with collection efforts against you. Thus, you should consult with an experienced Chapter 7 attorney before you execute this type of contract.
A Chapter 13 debtor is required to submit a repayment plan to the court for approval. The plan sets forth how the creditors will be paid, including the lender of your vehicle loan. If you owe more on your car than it is worth, you may be allowed to “cram down” your vehicle loan in order to lower the balance you must pay on it.
To cram down a car loan, the debtor’s Chapter 13 plan proposes to pay the lender what the car is worth, not the full amount due on the loan. In other words, if your car is worth $3000 and you owe $5000 on it, your car lender has a secured claim of $3000 and an unsecured claim of $2000. Since an unsecured creditor is paid pennies on the dollar owed (if anything at all) in Chapter 13, you could save up to $2000 on your car loan.
At The Law Office of Diane Anderson, our lawyer has been through a divorce, a bankruptcy, and faced estate planning and probate termination after her mother passed away at a young age. This kind of experience is unmatched by attorneys who have simply guided their clients through each process. Contact us today to schedule a comprehensive consultation.