“Dude, What About My Car?”: Car Loans in a Chapter 7 BK
I was speaking to a client on the phone this week reviewing some of his assets and liabilities when all of a sudden he says “Dude, what about my car? I don’t want to file if I have to give my car back.” I have to admit, being called “Dude” from a client a refreshing change of pace for the day, but I completely understood where he was coming from. For so many people like my “Dude" client, their car is the only means of transportation. Their livelihood depends on being about to drive to and from work. We are dependent on our cars, especially living in Los Angeles, CA. So I thought it was appropriate to review a few things about your car loan within a Chapter 7 bankruptcy.
If you are considering filing for Chapter 7 bankruptcy protection your assets, income, and liabilities need to be disclosed in your bankruptcy schedules ( “your paperwork”). One of the main assets that people have are their vehicles. Whether you have one or two, the value of that assets must be protected by state exemptions. An experienced bankruptcy attorney can go over the exemptions available to you. Most individuals either finance or lease their cars so it is important to know that you have several options with respect your car loan.
Do Nothing [and Continue Making Payments]
Once you file your case, the Automatic Stay is in effect. This means that none of your creditors can contact you or send you bills. This applies to your car lender(s). Even if you are in good-standing at the time of your filing, your car lender has to abide by the rules and stop sending you statements. They even have to stop all scheduled automatic payments for the coming homes. However, you will still be able to make your payments directly to your lender. Because car lenders want you on the hook, most of them do not allow you to keep the car without signing a reaffirmation agreement (discussed below). Every creditor is different. If you are able to retain your car and keep making your payments, you want to make sure you are in communication with your attorney about your rights.
Surrendering Your Car
One option is to surrender your vehicle either before or after your file for bankruptcy. If you surrender your vehicle prior to filing, any deficiency balance can be discharged through you bankruptcy case. The deficiency balance is the balance you still owe after the car lender resells the car and pays off your loan. Any amount still owing after the loan is paid is considered your deficiency balance.
Surrendering your vehicle through your Chapter 7 bankruptcy. If you are past due on your car payments and file for a bankruptcy, the lender can come and repossess your car within the first two months of your case. You can schedule a voluntary surrender through your attorney’s office to ensure a smooth transition.
Reaffirm Your Car; Reaffirmation Agreement
Reaffirming your car loan entails signing a reaffirmation agreement where you simply re-obligate yourself to the original terms of your vehicle loan. You are basically letting the bankruptcy court know that you can afford your car payments and you want to be responsible for the remainder of the balance owed. There are up-sides and down-sides to filing a reaffirmation agreement. Up-Side: Positive reflection on post-discharge credit score. Down-Side: Missed payment result in a repossession of vehicle. Proper planning with your attorney will enable you to enter into a successful reaffirmation agreement.
Redeem Your Car
This is where you can purchase the vehicle at fair market value – this requires a lump sum of money and a timely motion to redeem filed with the court. This is generally not a great option because you are only entitled to redeem at “retail” blue book value. Most people filing for a Chapter 7 bankruptcy are not in a position to pay a lump sum, so this usually isn’t an options used by debtors.
You have heard me say it a few times on this blog. Budgeting is everything. If you create a reasonable budget and show the court that you can afford your car payments, there is no reason why you shouldn’t reaffirm. In the end, it is important to remember that you do not need to surrender your car when you file a chapter 7 bankruptcy. The court allows you the opportunity to state your intentions with properties like your home and car. There are very few times a court will reject a reaffirmation agreement but the key to a successful one is properly planning with your attorney.
At Bouldoukian Law Firm, we go over all of these options with you in depth. We let you know what your options are so you can confidently make the best decision for you and your family.