car payments

You Can Keep Your Car In Bankruptcy... But Should You?

Bankruptcy affords numerous opportunities to keep your vehicle. This is important, because you need your car to get to work, pick up your kids, and in general get around a town that doesn't have great public transportation. However, just because you can keep your car in bankruptcy doesn't mean that you necessarily should.

Bankruptcy allows you to keep your vehicle as long as you can show that you can afford the payment. In Chapter 13 bankruptcy, you can even catch up on arrears owed and/or stop a repossession. The arrears can be made current over the three-to-five year repayment. So, in most cases, a car can be retained. However, there are situations when you should consider surrendering it through the bankruptcy.

The most common situation for surrender is when the arrears are too great to pay. If you qualify for a Chapter 7, and there are arrears on your vehicle, you would need to file a Chapter 13 bankruptcy to keep it. Chapter 13 bankruptcy is more expensive and time consuming that Chapter 7 bankruptcy, and it just might not be worth it. You can walk away from your obligation in Chapter 7, which may be an attractive option. When you walk away from a car in Chapter 7 bankruptcy, surrendering it to the creditor, your financial obligation is wiped away. You will not owe any deficiency.

An important point will be how much you owe versus what your car is worth. If you owe $20,000 and an additional $5,000 in arrears, but your car only has a Blue Book value of $15,000, it might not make sense to keep such a high payment for such a low-value car. If it is your only vehicle, and you absolutely need it to get to work, and there will be no other way to finance a vehicle in the future, you may need to bite the bullet and keep it. But, if you can use a spouse's or parent's vehicle, or take public transportation, bankruptcy might be a good opportunity to get away from the payment. It will depend on your particular circumstances.

I meet with many clients struggling with large car payments who, upon learning they can get away from the vehicle obligation, are happy to do so. Large car payment weigh my clients down. And cars only depreciate in value. It will not be very difficult to get financing on a more modest vehicle after filing your bankruptcy.

One situation where it probably makes sense to keep the car is when you must file a Chapter 13 bankruptcy that repays your unsecured creditors in full. In these cases, if you surrender a car, you will have to repay the deficiency on the car loan (unlike in a Chapter 7 bankruptcy). It doesn't make much sense to pay for a car you no longer possess, so keeping it is more likely your best option.

So what should you do? Contact us to set up a free consultation to discuss your automobile situation. I will be happy to sit down and review your case in detail. The monthly payment, your future prospects, and the condition of the vehicle should be considered. Your circumstances will probably dictate what you should do, but the decision will always be yours.

You Can Keep Your Car In Bankruptcy!

One of the most common fears expressed to me by potential bankruptcy clients is, "but I don't want to lose my car!" The good news... as long as you can afford to make the payment and keep it current, you can always keep your car in bankruptcy.

In Chapter 7 bankruptcy, you can keep your car as long as you are current at the time of filing. You are not required to return your car or lose your right to continue to make payments. Bankruptcy law allows you to retain the vehicle and continue to make payments. In most Chapter 7 bankruptcies it is simply a matter of continuing to make current car payments as normal. Nothing changes (though, you must be aware sometimes finance companies will stop sending you payment books while you are in bankruptcy so as to not violate the Automatic Stay).

If you are one or two payments behind, it is often advisable to catch-up with the payments before filing the Chapter 7 bankruptcy. This is not always easy to do, but it is worth waiting to file if you protect your car.

Bankruptcy exemption laws allow you to protect the equity you have in your car. Equity is just the value of the car minus what you owe. So, a car is like the rest of your property that can be protected from creditors. You creditors cannot take away your vehicle to satisfy their debt.

What if you are further behind on a car payment, perhaps three or four months? You can always file a Chapter 13 bankruptcy, which allows you to catch up arrears spread out over 36-to-60 months. Chapter 13 bankruptcy can even be used to get back a car that has been repossessed! (As long as the vehicle has not been sold at auction yet). I have used this option numerous times to save cars for my clients, sometimes for cars where payments that haven't been made for almost a year. The arrears owed on the vehicle are paid at 0% interest, so repaying what you owe in this way is a very realistic option.

Whether you should catch-up a few payments and file a Chapter 7, or file a Chapter 13 and catch-up through a bankruptcy reorganization, will depend on the circumstances. If other circumstances point to Chapter 7 bankruptcy or Chapter 13 bankruptcy, those circumstances will often dictate. If you are only a single payment behind and otherwise qualify for Chapter 7, it is usually advisable to catch-up before filing, as Chapter 7 has significantly less legal fees. Regardless, as long as you can afford it, you can keep it.

Contact us if you are having issues with you car payment and want to seek advice on making the payment.

Surrendering a Car in Bankruptcy

What to do with your car is an important decision when filing any bankruptcy. Should you keep it, or should you walk away? Chapter 13 bankruptcy can be used to save a car that is in arrears, even a car that has been repossessed (up to the moment of auction sale), by catching up the payments over a 3-to-5 year plan. This is great for situations where you temporarily fell behind, but need the car. However, there are also situations where a debtor will want to walk away from a car in bankruptcy, and the law provides this option as well.

A car can be surrendered in Chapter 7 bankruptcy by declaring it as such in the "Statement of Intentions". The Statement of Intentions is served on the finance company, and quite literally states your intentions. A surrendered vehicle will then be returned to the finance company, with the details usually worked out between the debtor and the company.

What is the advantage to doing this? In situations where the car is worth far less than what is owed, usually as the result of refinancing, it can be returned without the debtor facing any future obligation, even if the finance company sells the car for far less than is owed. The $10,000 you owe on your $1,000 Ford Fiesta that barely runs any longer doesn't need to drain your monthly budget any longer. You can give back the under-performing car and wipe out your financial obligation in bankruptcy.

This is also a great way to return a vehicle that no longer runs, or was severely damaged in an accident. Once again, a lemon or damaged car can be surrendered and returned without any further financial obligation. I often have my clients sit down and determine what their car is actually worth to them in its current condition, given their financial state.

What is the downside to surrendering your vehicle? Well, obviously you will no longer have a vehicle (of course!), and if someone can't help you finance or purchase a replacement, it may be difficult to do so on your own right out of bankruptcy. You will want to make sure you have a plan, otherwise it may make sense to keep a vehicle that is over-financed... sometimes an unfavorable car payment is better than no car at all, if it gets you to work, and school, and the grocery store, etc.

Vehicles can also be surrendered in Chapter 13 bankruptcy, but whether or not doing so is a good idea may depend on whether or not your are required to repay unsecured creditors in your Chapter 13 plan. A surrendered vehicle in Chapter 13 bankruptcy will become unsecured debt. If you are required to pay back your unsecured creditors in full, it may not make sense to surrender your vehicle.

If you are considering getting rid of an unwieldy vehicle, contact us to schedule a free consultation to determine your best route through bankruptcy.