What Happens to Your Car in Chapter 7 Bankruptcy?
Republished with Permission © 2011 Nolo.
by Attorney
Stephen R. Elias
People often wonder how
Chapter 7 bankruptcy will affect their ability to
keep their car. If you aren't making payments on a car, then you'll be able to
keep it if its value falls under your state's vehicle exemption amount. However,
if you are making payments on your car, it's not so simple. During your
bankruptcy, you'll need to decide whether you want to surrender the vehicle or
keep it by continuing to make payments. You let the bankruptcy court know what
you want to do by filing an official form called the Statement of Intention
(SOI) with your other bankruptcy papers, as well as mailing a separate copy of
the SOI to your vehicle lender. Similarly, if you are leasing your car, you can
either reject the lease on your SOI or can keep the car by assuming the
lease.
Walking Away From the Car
If you want to walk away from the car, you list the lender on your SOI and
state that you intend to surrender the vehicle -- that is, turn it in to the
lender. This will clear you of any further liability on the debt after your
bankruptcy. If you are leasing your car, you can get out of the lease by
rejecting the lease on your SOI.
Keeping a Car You're Still Paying For
If you want to keep a car you are making payments on, no matter what else is
going on in your bankruptcy, you should continue to make your payments as
scheduled. You do have a choice, however, on how to keep the car: You can either
pay the lender a lump sum to purchase the car at its current value (called
redemption ), or
enter into a new contract (called a reaffirmation agreement),
which lets you keep your car under much the same terms as your original car's
promissory note (although this is negotiable).
Sometimes your lender will let you keep the car without entering into a
reaffirmation agreement, by simply allowing you to continue to make the payments
under the old agreement (this is called the ride-through option). If your lender
has been accepting your payments, it's a sign that you may be able to retain the
vehicle and continue making payments without entering into a new reaffirmation
agreement.
Negotiating With the Lender to Keep the Car
To find out whether your lender will require a new contract, call them and
ask for the bankruptcy or loss mitigation department. Explain that you intend to
file for bankruptcy and ask whether you need to reaffirm the promissory note or
can instead retain the car and continue making payments without reaffirming.
If the lender agrees to let you retain the car and pay according to the old
agreement, the lender will still have a lien and can repossess the
car if you default on your payments.
But if the car is repossessed (or if you decide to give it back), you won't have
to worry about still owing a deficiency on the car (the amount of the loan minus
what the lender can sell the car for) -- that will be wiped out after your
bankruptcy case is over.
If the lender requires you to reaffirm the promissory note and you do
reaffirm it, consider carefully whether you want to do this. The lender will
have a right to repossess the car if you default on your payments
and
you will owe any deficiency that remains on your loan if that happens. If you
want to reaffirm your loan, you'll take the following steps.
Negotiate the Reaffirmation Agreement
First, you'll state on your Statement of Intention that you intend to
reaffirm the promissory note. Then, the lender will send you an agreement
setting out the same or similar terms as your old agreement. At this point you
should consider negotiating the terms more to your advantage. You do have some
leverage here, because the lender knows that bankruptcy gives you the option of
surrendering the car and canceling all liability. Lenders lose a lot of money on
repossessions, so they have an incentive to cut you a better deal, such as
reducing the principal of the loan to the car's current value. Don't be afraid
to attempt to negotiate for this. All the lender can do is say "No." If the
lender does say "No," you may want to consider surrendering the car at this
point, and let the bankruptcy erase your liability for the remaining payments on
the loan.
Have the Court Review the Reaffirmation Agreement
Once you and the lender have agreed on the terms of the reaffirmation
agreement, you'll sign the agreement and file it with the court. At the
"discharge hearing," near the end of your bankruptcy, the judge will decide
whether the agreement should be enforced. After considering your income, the
amount you owe on the car, and its value, the judge may decide that the
reaffirmation will create an undue hardship for you or be against your best
interests. If you still owe much more than the car's value, a judge might
disallow the reaffirmation.
What Happens If the Judge Approves the Reaffirmation
If the judge approves the reaffirmation agreement, you will continue to be
liable under its terms after your bankruptcy ends. For instance, if you have to
give the car back due to a loss of income, at a time when you owe $25,000 under
the agreement and your car is worth only $10,000, you'll be on the hook for the
$15,000 deficiency. Remember that because you can't file another Chapter 7
bankruptcy for eight years, you could be back where you started before you filed
for bankruptcy (another reason why a judge might not approve the reaffirmation
in the first place).
What Happens If the Judge Disapproves the Reaffirmation
If the judge disapproves the reaffirmation agreement, you don't necessarily
lose the car. According to several bankruptcy court opinions, you can keep the
car as long as you remain current on your payments. These courts reason that as
long as you do what is required of you by the bankruptcy code (state your
intention to reaffirm, sign and file the reaffirmation agreement, and attend the
discharge hearing), the fact that judge disapproves the agreement is beyond your
control and should not result in your having to give up your car. All of this is
conditioned, of course, on staying current on your payments. (See
In re
Moustafi, 371 Bankruptcy Reporter 434 (Bankr Ariz 2007).) You can read this
case at www.georgiabankruptcyblog.com/moustafi.pdf.
Paradoxically, if the judge disapproves the agreement, you will probably be
better off, because you will be left with the practical equivalent of the
ride-through option, meaning that you won't owe a deficiency should the car have
to be surrendered or repossessed.
For a Free Consultation and advise for your particular circumstances, contact the Haveman Law Office today, either online or at 616-499-7045
**we are a debt relief agency, helping individuals find relief using the United States Bankruptcy Laws**
