In figuring out what to do with a car in bankruptcy, the most important issue is, not surprisingly, the value of the car. Once you determine the private party Kelley Blue Book value of the car, the next step is determining the amount of your equity. If you subtract the amount that you owe on the car from the private party value of the car that will give you a good idea of what your equity is in that vehicle. In most cases, you can protect your car using the allowable bankruptcy code exemptions. The bankruptcy courts in both Oregon and Washington understand you need a car to get to work and to pick your kids up from school. So long as you aren’t driving an antique classic car, you will likely be able to keep it.
If you live in Washington, you will most likely be able to claim either the Washington State Bankruptcy Exemptions or the Federal Bankruptcy Exemptions in order to protect your car. In Oregon, you will most likely be limited to the Oregon Bankruptcy Exemptions. Regardless of whether you live in Oregon or Washington, your car is likely protected.
The real question is what to do about your car loan in bankruptcy. Depending on the age of the vehicle and the year it was purchased, you may find yourself greatly improving your car loan situation through bankruptcy. In the following sections, we will go through your car loan options in bankruptcy.
Car Loans in Chapter 7 Bankruptcy
Reaffirm: A reaffirmation agreement is a contract between you and the car creditor in which you agree to pay the balance owed on your car loan, despite the bankruptcy filing. You continue to make payments, and the creditor promises that, as long as payments are made, the creditor will not repossess or take back the property.
Reaffirmed debts are not discharged, and the debt survives the bankruptcy. If you do not make your car payments after you reaffirm the car loan, the car lender can repossess the car and sue you for the deficiency balance. After the finance company repossesses the car, they will sell the car at the auto auction. Usually the finance company does not get enough money from the auction to pay off your loan. This shortfall is called a “deficiency,” and you would still be legally obligated to pay the creditor the deficiency balance. As you can see, the decision to reaffirm your car loan is a serious financial matter.
Reaffirmation agreements are strictly voluntary. You are not required by the Bankruptcy Code or other state or federal law to reaffirm your car loan. Before entering into such an agreement, you will want to speak to a bankruptcy attorney to make sure that the reaffirmation is in your best interest.
Redeem: In Chapter 7, you have the right to purchase or redeem your car from the creditor by making a lump sum payment equal to the car’s fair market value. Bankruptcy Code provides that you must pay the creditor the replacement retail cost of the car. The balance of the debt will be discharged. For example, assume you own a car worth $10, 000.00, but owe the finance company $20,000.00. In this circumstance, you could redeem the vehicle by paying the creditor $10, 000.00, and the remaining balance will be discharged in your bankruptcy. A local bankruptcy attorney can advise you on the benefits of redeeming your financed car and identifying lenders that will provide the necessary funds for your vehicle redemption.
Surrender: If you cannot afford the monthly payments on your car loan, or if you determine that you owe more than the car is worth, you can unload the car and the debt in your Chapter 7 bankruptcy by surrendering the vehicle to the creditor.
Car Leases in Chapter 7 Bankruptcy
If you are leasing your car when you file Chapter 7 bankruptcy, you can choose to either continue making the monthly lease payments, or surrender the car back to the creditor. If you surrender the leased car, any obligation under the lease will be eliminated in your Chapter 7 bankruptcy case. Car Loans in Chapter 13 Bankruptcy
Chapter 13 bankruptcy is powerful tool to protect your car from repossession. If you have fallen behind on your car payments, you can file a Chapter 13 bankruptcy to stop the repossession of your vehicle. The amount you have to pay for your car depends upon when you bought your car.
910 Claims: If you bought your vehicle within 910 days of filing your bankruptcy case, you must repay the entire car loan. The good news is that the interest rate you pay on your car loan may be reduced. For example, if you owed $10,000 on a car loan whose blue book value was only $5000, you would be required to pay the entire $10,000 balance if the car was purchased less than 30 months, or 910 days, of filing. In short, debtors who want to keep their cars must pay the full loan amount rather than “cram down” the debt to the value of the car.
Cram Down: If you bought your car more than 910 days before you file bankruptcy, you will only have to repay an amount equal to the present value of the car. For example, if you owed $10,000 on a car that is worth only $2000, upon filing Chapter 13 you would be required to repay the finance company only $2000 over the three to five year term of your Chapter 13 repayment plan.
Car Leases in Chapter 13 Bankruptcy
You car lease cannot be paid through the Chapter 13 bankruptcy repayment plan that you devise with your bankruptcy attorney. You can “assume” the lease and continue making the monthly payments. You can “reject” the lease and return the car to the creditor. The creditor will sell the leased vehicle, apply the sale proceeds to your lease balance and then file a claim in your Chapter 13 bankruptcy case for the lease deficiency. This deficiency is an unsecured, non-priority claim, which means you will likely only pay that creditor pennies on the dollar.