People often wonder about keeping your car in bankruptcy and how Chapter 7 bankruptcy will affect their ability to keep their car; especially If you’re struggling with debt, the fate of your car is generally a high priority. If you do want to keep your car, then the answer will depend on two factors: (1) Whether you are still making payments on the car; and if not, then how much the car is your car worth, and can you “exempt” the “equity” in the car/ “asset” from the bankruptcy process?
If You Are Still Making Payments on Your Car
If you want to keep your car and if still owe payments on a car loan, then you can generally choose to execute a “reaffirmation agreement” with your lender. By signing a reaffirmation agreement, you agree to continue to be obligated for the debt. With a reaffirmation agreement, you take your car out of the bankruptcy process. You continue to make your regular payments and you keep your car.
If You Own Your Car Outright (Bankruptcy Exemptions)
First, let’s take a step back. Remember, in every Chapter 7 Bankruptcy proceeding, a bankruptcy trustee liquidates all your “non-exempt” assets and uses the proceeds to pay toward your unsecured debt.
If you own your car, your car is an “asset”. The value of that asset may or may not be exempt depending on which system of exemptions you have chosen to use. In California, you are allowed to choose between two systems of exemptions for protecting your assets.
Under System 1, you can exempt up to $3,050 of equity in your vehicle. Under System 2, you can exempt up to $5,350 of equity in your vehicle. Unfortunately, you cannot mix and match the exemption systems, and the system of exemption you choose will often depend on whether you also own a home.
So, in short, the fate of your car will depend on two factors: (1) How much your car is worth; and (2) if the value of your car is below one of the allowable exemption amounts. If your car is worth less than the exemption amount, the trustee can’t sell it.
The Need for a Qualified Attorney
Using a qualified attorney to assist you in the process of determining which system of exemption best fits your needs is critical not only because exemption amounts change, but also because the decision to choose one system of exemptions over another is also based on the totality of your assets and the goal is always to protect as much of your exempt assets as possible.
What if you have more equity in your car than what is allowed under an Exemption?
If you have more equity in your car than an exemption amount, you can still seek to negotiate with the for the difference by which your equity exceeds the exemption amount. Here again using a qualified attorney to assist you in negotiating with the Trustee is of paramount importance.
What if you own more than one Car?
If you have two cars and you file Chapter 7 bankruptcy, you may or may not be able to keep both vehicles. Whether you can do so will often depend on whether the cars are paid off, and if they're not, the amount of your car payments and why you need the vehicles. If both your cars are paid for and there are no liens on them, you can keep them both if you can exempt the equity in both. Often, however, this is not the case. Again, you should consult with a qualified bankruptcy attorney to assist you in confirming if you can protect both vehicles in bankruptcy. Failure to do this could result in one or both assets being liquidated to pay creditors.
What if you have a “title Loan”?
A “title loan” creates a “secured debt” and Chapter 7 exemptions do not affect secured debts. In a Chapter 7, you do have the option to “redeem” a secured debt. That’s the only way to keep your car through the bankruptcy. To redeem title loan debt, however, you’ll generally have to pay the market value of the car in one lump sum. For example, say your car is worth $5,000 but you owe $7,000 to the title lending company. You can pay $5,000 in bankruptcy and the rest of the debt will be discharged. It’s often impossible, however, for many debtors to put together enough cash to redeem a “secured debt” in a vehicle. There are companies that specialize in funding redemptions, and a qualified attorney can often assist you in discussing these options with you.
In the alternative, you can choose to “reaffirm” your “secured debt”. Given the high rate of interest on a title loan, though, many individuals do not find this to be an attractive option as you agree to continue to be bound by that debt throughout and after your bankruptcy.
The Need for a Qualified Attorney
A qualified attorney can assist you with discussing options that include selling the car before you file for bankruptcy and using the proceeds to repay the title loan debt. Or, if your car isn’t worth enough to sell to over the “title loan”, then you can surrender it to the title loan company. Unfortunately, you may lose your car but with such proper “pre-bankruptcy” planning, your attorney can assist you in getting any deficiency judgment obtained by the title loan company (when your car is sold at auction) discharged in a subsequent Chapter 7 bankruptcy filing. Be aware though, if you file for Chapter 7 bankruptcy and fail to address your title loan debt, the title loan company/”secured creditor” will be able to repossess your car as soon as your bankruptcy ends, and if they sell it for less than the title loan amount, you will still be you’ll be liable for the deficiency after the bankruptcy!
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