Many financial victims wonder what will happen to their car if they file for bankruptcy. They fear their car will be taken, leaving them and their family stranded with no mode of transportation to get the kids to school and themselves to work.
More often than not, the real question is not “can I keep my car?,” but rather which bankruptcy option is best for you for choosing to keep the car. The current economic climate and high rate of default contributes to a favorable environment for debtors in bankruptcy wishing to keep their vehicle.
With Chapter 13 bankruptcy(a repayment plan under the protection of the bankruptcy court) your car is safe from creditors. The bankruptcy trustee does not seize and liquidate any assets and they remain in your possession. You must, however, propose a viable Chapter 13 repayment plan that addresses (among other things) continuing payments on your car loan. You will also need to maintain appropriate insurance coverage for the vehicle. There are other options as well, but they arise more frequently in a Chapter 7 bankruptcy.
With Chapter 7, the bankruptcy code gives you the option to surrender, redeem, or reaffirm. There is also the unwritten option of the ride-thru, which may still be an option in your jurisdiction.
1) Surrender – This option is generally a good idea if you are significantly ‘upside down’ in your car. It makes very little financial sense to continue to pay, say $15,000 for a vehicle that is worth much less on the open market. When surrendering your car in bankruptcy it is wise to have a back-up transportation plan. You may be pleasantly surprised at the options available to you, such as using public transportation or borrowing a car from a friend or family member. If you are willing to pay for the use of the car and for insurance, most people are willing to help others in a pinch.
2) Redeem – You may redeem your vehicle during the bankruptcy. This means you pay the fair market value of your vehicle to the lender and you own it outright. So if your car loan is $10,000 but it’s only worth $4,000, you may redeem it – or purchase it – for $4,000. Where do I get that kind of cash, you may wonder, if I just filed bankruptcy? There is a thriving industry of finance companies that specialize in auto loans used for bankruptcy redemption purposes. Be cautious and research several companies. As you could imagine, the companies involved in this business range from those with a legitimate business purpose to those more interested in gouging the financially unfortunate. Review the fine print with your attorney.
3) Reaffirm – Reaffirm means that you agree to enter into a new loan agreement with your auto lender. This is a good opportunity to have your attorney try to negotiate new terms such as a lower interest rate or to extend the loan period, both of which will lower your monthly payment. You can generally get better deals by surrendering your vehicle and then buying a car after bankruptcy. So if your lender won’t budge, consider that option. In order to reaffirm you must be able to show that you can make the monthly payments and that keeping the debt won’t pose an undue financial hardship on you or your family. In many cases, this may be difficult, but it depends on your particular circumstances. When preparing the documents for your bankruptcy case, an experienced attorney can do much by presenting your overall case in the best possible light, thus increasing your chances for reaffirmation. Ultimately, the judge decides whether to approve a reaffirmation agreement. Be aware that by reaffirming a debt you are obligating yourself anew to pay the debt. When you filed bankruptcy, the original loan agreement obligating you personally was terminated. The lender’s only recourse is repossession of the vehicle. But if you reaffirm a debt, you are personally back on the hook. Your attorney can help you decide if reaffirmation is right for you.
4) Ride-thru – The term ride-thru means you elect none of the above but you continue to make payments on your vehicle and therefore keep your vehicle without re-obligating yourself personally as you would if you reaffirmed as explained above. Because the bankruptcy code doesn’t expressly authorize the ride-thru, whether it’s available in your jurisdiction is a matter of court interpretation. Your attorney can help further explain risks and rewards of a ride-thru.
-Ron Glines, J.D., Lead Salt Lake City, Utah Bankruptcy Attorney at the Law Firm of Craig Swapp & Associates. If you feel you may be in need of Ron’s help, contact him today using the form on the right or call us at the number above.
