The Ultimate Guide to Keeping Your Car in Bankruptcy
Filing for bankruptcy can be a stressful and overwhelming process, and one of the biggest concerns for many individuals is what will happen to their assets, including their car. If you’re considering filing for bankruptcy and are wondering whether you can keep your car, you’re not alone. In this blog post, we’ll explore the options available for keeping your car in bankruptcy and the factors to consider when making this decision. We’ll also discuss the importance of seeking the guidance of a bankruptcy attorney to help you navigate this process and make the best decision for your unique financial situation.
Yes, it is possible to keep your car if you file for bankruptcy. There are two main options for keeping a car in bankruptcy: reaffirming the debt or redeeming the vehicle. Reaffirming the debt means that you agree to continue making payments on your car loan after filing for bankruptcy while redeeming the vehicle means paying the lender the current market value of the car in a lump sum payment. Whether you can keep your car in bankruptcy may depend on your financial situation, the car’s value, and the terms of your car loan. Therefore, it is important to seek the guidance of a bankruptcy attorney to help you understand your options and make the best decision for your unique financial situation.
Before diving in too far, let’s first take a quick look at how filing a bankruptcy may affect debts.
Overview of Bankruptcy and How it Affects Debts
Bankruptcy is a legal process that allows individuals to get a fresh financial start by discharging (eliminating) certain types of debt. There are several different types of bankruptcy, but the two most common types for individuals are Chapter 7 bankruptcy and Chapter 13 bankruptcy.
Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” allows individuals to discharge certain unsecured debts, such as credit card debt, medical bills, and personal loans. To be eligible for Chapter 7 bankruptcy, an individual must pass the Means Test, which compares their income to the median income in their state. If their income is below the median, they may be eligible to file for Chapter 7 bankruptcy.
Chapter 13 bankruptcy, also known as “reorganization bankruptcy,” allows individuals to repay their debts over three to five years through a repayment plan. To be eligible for Chapter 13 bankruptcy, an individual must have regular income, and their debts must fall within certain limits.
While bankruptcy can help individuals get a fresh financial start by discharging certain debts, it’s important to note that bankruptcy can also affect secured debts, such as a car loan. A secured debt is a debt tied to a specific asset, such as a car or a home. If an individual files for bankruptcy and chooses to keep the asset, they may be required to continue making payments on the secured debt. If they are unable to make the payments, they may be at risk of losing the asset.
Options for Keeping Your Car in Bankruptcy
If you’re considering filing for bankruptcy and want to keep your car, there are two main options: reaffirming the debt or redeeming the vehicle. It’s important to note that these options may not be available in every case and may depend on the borrower’s specific circumstances, such as the value of the car and the terms of the car loan. Here’s a closer look at each option:
- Reaffirming the debt: Reaffirming the debt through a reaffirmation agreement means the borrower agrees to continue making payments on their car loan after filing for bankruptcy. Reaffirming a debt can be a good option for individuals who want to keep their car and can make the payments. Reaffirming the debt requires the borrower to sign a new contract with their lender, which outlines the terms of the new repayment plan. It’s important to note that the borrower is still responsible for paying back the total amount of the loan, even if the car’s value has decreased.
- Redeeming the vehicle: Redeeming the vehicle means that the borrower pays the lender the current market value of the car in a lump sum payment. Redeeming can be a good option for individuals who want to keep their car but cannot pay their car loan payments. To redeem the vehicle, the borrower must pay the lender the car’s current market value in a single payment. Any deficiency balance owed on the vehicle will be discharged in bankruptcy. The deficiency balance is the difference between the market value of the car and the amount still owed.
Consequences of Not Reaffirming or Redeeming a Secured Asset in Bankruptcy
One of the consequences of not reaffirming a debt or redeeming a secured asset in bankruptcy is the risk of losing the asset. For example, if a borrower decides not to reaffirm a secured debt, such as a car loan, or does not redeem the secured asset, such as a car, they may risk losing the asset to the lender.
I usually tell my clients to consider reaffirming a car loan if the lienholder is Ford Motor Credit (because they will come and repossess the vehicle if you don’t sign it), if the lien is with a credit union (because they tend to be more likely to come and pick up a vehicle), or I would consider reaffirming a debt if there is a lot of equity in the car.
However, even if you sign a reaffirmation agreement, the lender may repossess the asset if the borrower cannot make the secured debt payments after filing for bankruptcy. For example, in the case of a car loan, the lender may repossess the car if the borrower cannot make the payments after filing for bankruptcy. Similarly, if the borrower does not redeem the vehicle by paying the lender the current market value in a lump sum payment, the lender may repossess the car.
It’s important to remember that not reaffirming a secured debt or redeeming a secured asset may also negatively affect the borrower’s credit score and credit history. A repossession can be an adverse event on a credit report and may lower the borrower’s credit score.
Factors to Consider When Deciding Whether to Keep Your Car in Bankruptcy
When deciding whether to keep your car in bankruptcy, it’s essential to consider the pros and cons of each option (reaffirming the debt or redeeming the vehicle) and how they may affect your financial situation. Here are some factors to consider:
- Financial situation: The most important factor to consider is whether you can afford to make the payments on your car loan after filing for bankruptcy. If you cannot make the payments, try to redeem the vehicle or consider other options, such as selling the car or surrendering it to the lender. On the other hand, if you can make the payments and want to keep the vehicle, reaffirming the debt may be your best option.
- Value of the vehicle: The value of the vehicle is another important factor to consider. If the car’s value is less than the amount still owed on the loan, redeeming the car may make financial sense.
- Terms of the car loan: The terms of the car loan, including the interest rate and the repayment period, can also impact the decision to keep the car in bankruptcy. If the loan terms are favorable, it may be more affordable to reaffirm the debt and continue making payments. On the other hand, if the loan terms are unfavorable, it may be better to redeem the vehicle or consider other options.
It’s important to remember each borrower’s financial situation is unique, and what may be the best option for one person may not be the best option for another. That’s why it’s so important to seek the guidance of a bankruptcy attorney to help you make the best decision for your unique financial situation. An experienced bankruptcy attorney can help you understand your options and provide guidance on the best course of action.
Am I Responsible for the Loan On My Car If I Voluntarily Turn it In?
You will still be responsible for the loan or debt on your vehicle even if you voluntarily turn it in. If you have a vehicle that you cannot make payments on, you have the choice of voluntarily surrendering the car or you can let the creditor repossess it. What many people do not know is voluntarily surrendering the vehicle is still considered a reposession on your credit report, a voluntary reposession.
What is Cross Collateralization in Bankruptcy?
Cross collateralization is a clause in a purchase contract that secures a loan which serves as collateral for all other loans made with the borrower in the past, present, and future. This type of loan is usually found at credit unions, but can sometimes be found at your typical banks. Cross collateralization most commonly occurs […]
Do I Still Have to Make Mortgage Payments While I’m in Bankruptcy?
Once you decide to file Bankruptcy, whether it is a Chapter 7 bankruptcy or Chapter 13 bankruptcy, you will need to decide if you intend on keeping your home. If you qualify for a Chapter 7 bankruptcy filing and you wish to keep your home, you will need to be current with your mortgage payment(s) and your homeowners’ association dues at the time of filing. As per federal bankruptcy law, you must remain current throughout the duration of the bankruptcy; this includes first, second, third mortgages attached to the home, as well as, your homeowner’s association dues. If you fail to keep current with your mortgage payment(s) or your homeowners’ association dues, the “relief from stay” can and most likely will be lifted and the mortgage company or the homeowner’s association may initiate foreclosure proceedings on the home.
In a Chapter 13 bankruptcy filing, you will make monthly payments to the Trustee’s office. The Trustee will then distribute those funds to your creditors. The creditor payments are according to priority deemed by the Bankruptcy Court. Your mortgage lender is almost always one of the creditors at the top of the list. Therefore, you will not be making direct payment to your mortgage lender if you are behind on payments. This payment will be included in your Chapter 13 payment plan and the Trustee’s office will make the mortgage payment from the funds you send each month. An exception would be your homeowners’ association dues, which you will continue to make payment directly to the homeowners’ association. Also, in some districts if you are current on your mortgage payment the Trustee will allow you to make direct mortgage payments to the mortgage company.
Regardless of which type of bankruptcy you plan to file, if you want to keep your house you will need to continue to make your mortgage payments and stay current on your payments.
Confessions of Former Debt Collectors via CNN
Today CNN is running an eye opening article about the tactics and strategies used by debt collectors or creditors. The article covers 10 different people who used to call and harass people for a living. They unveil some of the extreme tactics that creditors use to get money from debtors. A common theme that is seen throughout the ten different stories is the fact that these people make their money by collecting money.
Many of these creditors are on commission and the more money they bring in the more money they make for a living. Is this the best way to ethically collect debt? We too often see that creditors will bend or even break consumer protection laws simply to make a little more money. If they aren’t being commissioned then maybe there would be more civility in the debt collection profession. Regardless, this is a great article by CNN – check it out. The article is called Confessions of Former Debt Collectors.
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