For many of us our car is our lifeline to work, family and getting all those day-to-day chores done. The fear of losing our means of getting around and being able to report to work daily, pick the children up at school and putting food on the table can be overwhelming. So what are some of the options available in bankruptcy when it comes to your wheels?
Both types of personal bankruptcy (Chapter 7 and Chapter 13) address cars, car loans and vehicles owned outright. If your car, due to payment arrears, is in danger of being repossessed, the automatic stay which goes into effect immediately upon your filing is calculated to stop a creditor from taking your means of transportation. In most cases, this goes into effect right after your case is assigned a docket number.
Once in bankruptcy, there are options available to you that will allow you to keep a car. Quite important for those who must have four wheels to commute.
- Keeping the Car under Chapter 7 – When your case is filed, the Statement of Intention (SOI) lets the bankruptcy court, creditor and trustee know your intentions with respect to you car. The SOI is filed with your other bankruptcy papers, as well as mailing a separate copy of the SOI to your vehicle lender. You may choose to “Reaffirm” the loan with your lender which allows you to continue paying car payments under the same agreement as before your bankruptcy filing. Though this is very often “wishful thinking,” if you have the financial wherewithal to make a lump sum payment equivalent to the value of the car (if you had that kind of money, you probably wouldn’t be in a bankruptcy) and the car is yours. If you car is not subject to a loan or lease, there are various state and federal exemptions that can exempt the car. To effectuate your intentions to reaffirm a loan or lease, a Reaffirmation Agreement (RA) must be filed and approved by the Bankruptcy Court Judge assigned to your case. The RA details the terms of your agreement, the value of you car and your ability to make the payments going forward. The RA must establish to your judge that it does not impose a undue hardship of you, the debtor. Why? Because if you are unable to make the future payments on a reaffirmed debt, you remain liable for the consequences of your default; your discharge in bankruptcy DOES NOT APPLY! This consequence results in the Bankruptcy Court Judge assigned to your case to closely scrutinize your ability to make the payments. Equity in your car helps. The existence of a non-debtor co-borrower helps. Having sufficient income to make the payments help. Your judge is seeking to determine that in a worst case scenario, you will not be financially harmed post-bankruptcy. In order to assist him/her in that determination, you may be called to testify in court. Don’t panic. It can be done by phone. If your judge determines that allowing the RA will impose an undue hardship upon you, all is not lost. As a result of the difficulties sometimes inherent in RA approval process, another way has been crafted . . . the pay and retain. The lenders or lessors really going the RA route and the pay and retain . . . the former, you remain liable in a worst case situation, the latter, you have no remaining liability to the lender or lessor.
- Surrender this car for a less expensive model. If you have an unaffordable car payment or the car is worth less than you owe, then you just let it go, discharge the liability and purchase a less expensive car. If this is the route you choose, you certainly want to discuss your intention and the best manner in which to address in your bankruptcy filing.
- File a repayment plan under Chapter 13. If you have regular, sufficient monthly income, then a Chapter 13 repayment plan might save your car. You may be able to add your car loan to your overall Chapter 13 plan and possibly even renegotiate the terms. While this exists as a recourse, it is quite unusual for a Chapter 13 to be filed for the sole reason of curing the arrears on a car lease or loan. Most lenders are willing to work with willing debtors in Chapter 7s at arriving at a mutually agreeable arrangement that permits the debtor to retain the car and the lender to be paid. Again, the lender generally does not want your car.
To learn more about redeeming and reaffirming secured property in a bankruptcy please contact qualified and experienced attorney.