What Happens to Your Car After Filing Bankruptcy?
Maintaining possession of your car in bankruptcy is dependent on a few factors. In this post you’ll be able to determine which situation applies to you and what you should do based on your specific circumstance.
If you filed for Chapter 7 Bankruptcy
Because Chapter 7 bankruptcy essentially cancels your debt, you are forced to give up non-exempt property to pay off money owed. So, whether you must give up your vehicle will depend on if the vehicle is exempt and/or if you are behind on payments.
If your car is exempt:
Exemption limits vary by state, however if you own a car outright worth $4,000 and your state has a vehicle exemption of up to $5,000, you would get to keep your car in Chapter 7 Bankruptcy. If your car is on loan and the market value of your car less the amount of your car loan is significantly higher that the applicable exemption amount, the trustee will either sell your vehicle, provide you with the exempt portion, and use the rest to pay off creditors.
Vehicles on loan
For vehicles on loan, and when you are behind on payments, even if the vehicle is exempt, you can expect to lose your vehicle. The only situation where you would be able to maintain the car is if someone agrees to pay the loan on your behalf. If you are forced to surrender the vehicle, there is a benefit to doing so. While you will lose the car, you will be able to walk away from the loan freely and completely. So, some clients actually prefer this option.
Keeping a loaned car
If you’re interested in maintaining your vehicle and it is on a loan, you have the option to “retain-and-pay” your vehicle. In this situation, you discharge your loan, which means your lender treats you, the car, and payments made on the car completely separate of your bankruptcy. While you continue to keep the vehicle, your loan company does not pursue you and you continue to make payments for as long as you want.
Once the loan is paid off the lien can be released to you and you will freely own the vehicle. It’s important to note that not all lenders allow the “retain-and-pay” scenario so it will depend on the bank that provided the loan. Credit unions, for example, usually do not allow this and instead require a process called “reaffirmation” which you should ask our team about.
If you filed for Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, you are able to keep all property; however, in your repayment plan, you’ll be required to pay creditors the value of any non-exempt property, or your disposable income, whichever is higher. Options for this type of bankruptcy are more flexible and include reducing principal/interest for cars on loan. Because you are able to maintain assets, your main goal will be to recover from money owed.
If you’ve purchased your vehicle recently (within the last two years) you may be able to reduce the principal of the loan to only what the car is actually worth. Essentially, instead of paying interest on the car’s initial worth, you are able to pay less by paring on what the car is currently worth. And reducing the interest you’re paying follows a similar process. You’ll need to enlist the help of professionals to do this, and Davis, Ermis, and Roberts P.C. are here to help you the whole way.
There is help and hope
If you’re feeling suffocated under a looming bankruptcy or fear car repossession, it’s important to understand your rights and receive guidance for your specific situation. The experts at Davis, Ermis, and Roberts P.C. will be your greatest advocate in exploring all of your options to help you re-build the life you deserve.