What Happens to Your
Car in Chapter 7 Bankruptcy?
by Attorney Stephen R. Elias
Chapter 7 bankruptcy allows you
to keep or surrender your car or truck.
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.
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