Category Archives: Bankruptcy and Vehicle Loans

Will I Lose My Car In Chapter 7?

By Ryan C. Wood

In most chapter 7 bankruptcy cases your vehicles are protected or exempted from the bankruptcy estate created at the time the bankruptcy petition for relief is filed.  Each state has exemptions to protect your property, including your vehicles, so you will not lose your car in chapter 7.  If your car is worth a lot of money though the applicable exemption may not protect the entire value of the vehicle.  If you have a vehicle loan you need to continue to make the normal monthly loan payment so you will not lose your car in chapter 7.

State or Federal Exemptions Protect Assets

There are state and federal exemptions to protect your stuff like a car.  Depending upon your jurisdiction you may have to your state’s exemptions or choose the federal exemptions.  There are limits to the dollar amount of the different categories of exemptions though.  So if you have a vehicle with a loan and still have a lot of equity in the car the car exemption in your jurisdiction may not protect or exempt the entire value of the car.  For example the vehicle exemptions under the California set of exemptions, CCP 703 is a total of $5,850.  It can be applied to any number of vehicles.  In California under CCP 703 exemptions we also have what is called the Wildcard Exemption totaling $30,825 to apply to any asset if none of it is used to protect equity in real property or a burial plot.  So between the vehicle exemption of $5,850 and $30,825 your vehicle or vehicles can be pretty valuable and still be entirely exempted or protect so you will not lose your car in chapter 7.  Make sure you accurately disclose the vehicles you own and then discuss the value of your vehicles with your bankruptcy attorney prior to ever filing a petition under chapter 7 of the Bankruptcy Code.    

Deduct Vehicle Loan From Value of Car

Something that you may not initially remember is to deduct the amount of the loan from the value of your vehicles.  If your vehicle is worth $10,000 with a loan of $9,000 then there is only $1,000 of value or equity to be protected by the exemptions discussed above.  So you could have five cars all with loans and the amount of value or equity to protect could be very little after deducting the loans.

Vehicle Loans

In 2005, the last major reform of the Bankruptcy Code, the treatment of vehicles loans was supposed to change.  You are supposed to be able to only do three things: reaffirm the loan and continue to make the loan payments and keep the vehicle, or redeem the vehicle for its fair market value, or surrender the vehicle and any balance owed on the loan is discharged in the bankruptcy case along with your other dischargeable debts.  In the real world this is not exactly happening depending upon your jurisdiction.  Reaffirming the loan means signing a new loan agreement after the chapter 7 is filed agreeing to the same loan terms or better terms.  You will then be liable for the loan again and in the event you miss payments and the vehicle is repossessed you may owe the loan company money on the loan.  Traditionally and prior to 2005 you could just continue to make your normal loan payment each month and life goes on.  If you do not make the loan payment the loan company can repossess the vehicle.  This is true whether you reaffirm the loan or not.

The reality is most Courts, or good judges, do not believe the reaffirmation of the vehicle loan is in your best interests and they would prefer you to just continue to make the normal monthly vehicle loan payment without reaffirming the loan.  The catch is the Bankruptcy Code was changed in 2005 to allow a vehicle loan lender to repossess the vehicle even if you are current on the loan payments when filing a chapter 7 bankruptcy case.  This quandary puts us bankruptcy attorneys in a tough spot on what advice to give clients.  Most Courts and judges believe as long as you pay the monthly vehicle loan payment the lender will not repossess the vehicle.  The problem is the Court or judge will not be the party having to clean up that mess and generally chapter  7 clients do not have the funds to pay for such services.  If you do choose to reaffirm a vehicle loan there should be a hearing on the reaffirmation agreement and be prepared to tell the judge why you believe it is in your best interest to reaffirm this debt.  The leading reasons are for the monthly payments to be reported to the credit bureaus to help rebuild credit after filing the chapter 7.  The vehicle may be worth a lot more than what the loan balance is so you do not want to any chances with the vehicle being repossesses and possibly losing out on the equity you have in the car.  You have a co-signor and you want to make sure nothing bad can happen to the person that was nice enough to help you get the loan and co-signed with you.  You were able to negotiate better loan terms as part of the reaffirmation agreement so you are paying a lower interest rate, lower principal balance or both and therefore the monthly vehicle loan payment is less.

Voluntary Surrender of Car

If you want to get rid of your vehicle loan and car then you may voluntarily surrender the vehicle and then you are choosing to lose your car in chapter 7.  If you can no longer afford the monthly vehicle loan payment or it is a struggle each month you may file chapter 7 and surrender the vehicle or vehicles back to the lenders.  Any balance owed on the loans after surrender is discharged along with you other dischargeable debts in the chapter 7 bankruptcy case.

The bottom line is generally it is very rare to lose your vehicle when filing a chapter 7 case unless it is you choosing to surrender the vehicle to the lender.

What Can I Do If I Cannot Afford My Monthly Vehicle Loan Anymore?


What can I do if I cannot afford my monthly vehicle loan payment anymore? The problem is you have a vehicle loan payment that is too high and causing you problems each month with your bills. What can you do about it? There are any numbers of options to try and reduce the payment or get rid of the vehicle in the real world. Most of them end with the vehicle loan company sending you a bill once the vehicle is gone. This article focuses on forcing a set of terms, more favorable loan terms, on loan companies by filing for bankruptcy protection.

Depending upon the circumstances bankruptcy can reduce the principal amount owed on a loan and reduce the loan percentage rate thereby reducing your vehicle loan payment amount each month. The entire point of filing for bankruptcy protection is to eliminate, reorganize and reduce debts. Here we are talking about redeeming a vehicle for its fair market value in a Chapter 7 bankruptcy or cramming down on a vehicle loan in a reorganization case under Chapter 13, 9, or 12 by filing a motion to value the collateral of the secured loan.

So What Are The Savings To You?

The simplest answer is the savings will be the difference between what your vehicles is worth and what is owed on the vehicle loan, plus any reduction in the loan percentage rate. The larger the gap between the value and loan balance the larger the savings. If you vehicle is only worth $10,000 and the balance on your loan is $18,000 filing bankruptcy can reduce the amount you have to pay back to what your vehicle is worth ($10,000), not what is owed on the vehicle loan. So in our example the difference or savings is potentially $8,000. See below for issues that could make the savings less though.

Redeeming A Vehicle For Its Retail Value or Fair Market Value In Chapter 7 Bankruptcy

In a Chapter 7 the result is substantially the same as in a Chapter 13 reorganization case, but the law is different in reducing the vehicle loan. In Chapter 7 liquidation cases vehicle loans are reduced by redeeming the vehicle for its fair market value with new financing. A new loan is obtained for the retail or fair market value of the vehicle, as in our example $10,000, and the old loan company is forced to take the $10,000 in satisfaction of the original $18,000 vehicle loan. This is a 722 redemption. A motion has to be filed with the court and depending upon the jurisdiction a hearing may have to be held. In the Northern District of California we can notice motions on scream or die notice and seek a default if no opposition or request for hearing is filed with the court. The motion should cost anywhere from $500 – $1,400 depending upon your bankruptcy attorneys. The catch here is usually the new financing, new loan to pay off old loan, has a high percentage rate and there are process and origination fees usually. I have to say I am not a fan of redeeming vehicles for their fair market value under 722 of the Bankruptcy Code.

Courts have previously articulated its general approach to redemption under § 722 in the case of In re Lopez, 224 B.R. 439 (Bankr. C.D. Cal. 1998). Under that approach, the proper date for valuation of property under Bankruptcy Code §722 is the date of the hearing on the redemption motion. In re Lopez, 224 B.R. at 444. But see In re Eagle, 51 B.R. 959, 962 (Bankr. N.D. Ohio 1985) (date of valuation is petition date).

Cramming Down A Vehicle Loan In A Reorganization Case

In a Chapter 13 or some other reorganization case a motion to value the collateral, the vehicle, is filed and the value of the collateral is determined. This is the amount that has to be paid through the chapter 13 plan to the original vehicle loan company. Again, in our example a motion to value the vehicle would be filed valuing the vehicle at $10,000. What many bankruptcy attorneys do not tell you is you have to add in the attorneys’ fees and the chapter 13 trustee fee to truly calculate the savings via a chapter 13 case and chapter 13 plan. In our example I will use attorneys’ fees of $4,000 [$67 of the monthly chapter 13 plan payment] and the chapter 13 trustee gets a percentage of the monthly plan payment. I will use $67 a month for the chapter 13 trustee too, or $4,000 over the life of the chapter 13 plan. Even if the savings is not huge, no matter what, the monthly payment will decrease significantly since the chapter 13 plan will re-amortize the loan in the three to five year chapter 13 plan. For example the original loan in our example has a principal balance owed of $18,000 at 17% interest. The total amount financed is $28,841 and the monthly vehicle loan payment is $447 a month for five years. After filing for chapter 13 bankruptcy and valuing the vehicle/collateral at $10,000 with percentage rate of only 5% the total payoff is reduced to $11,323 and the monthly vehicle loan payment is reduced to $189, a reduction of $258 each month. For many people this reduction allows them to keep the car and pay their other living expenses on time each month without stress.

How To Value The Vehicle Under The Bankruptcy Code?

There is no absolute formula when determining the value of a vehicle. Courts will generally begin with determining the retail value figure based upon the year, make, model and mileage for the vehicle.

As a general principle, absent unusual circumstances, the retail value of a vehicle should be calculated by adjusting the Kelley Blue Book or N.A.D.A. Guide retail value for a like vehicle by a reasonable amount in light of any additional evidence presented regarding the condition of the vehicle and any other relevant factors. See In re Coleman, 373 B.R. 907, 912-13 (Bankr. W.D. Mo. 2007); In re Carlson, No. 06-40402, 2006 WL 4811331, at *2 (Bankr. W.D. Wash., Dec. 8, 2006); In re Eddins, 355 B.R. 849, 852 (Bankr. W.D. Okla. 2006).

There are usually competing appraisals provided to the bankruptcy court. One from N.A.D.A. or another from KBB. Or two different valuations from KBB. Regardless the court has to make a determination of what value to start at. After that the bankruptcy court should look at the specific condition of the vehicle as of the date the petition for bankruptcy protection was filed. If the vehicle in excellent (less than 5% of vehicles) good or fair condition. The will then make a reasonable adjustment to the starting point valuation discussed above.

What Evidence Should I Present To Prove Value?

I am of the opinion that more is more and not more is less under these circumstances. A picture does speak a thousand words. Take a picture of each scratch in the pain and each dent. That could result in 30 pictures of every little scratch or dent. So be it. Take pictures of the interior of the vehicle and each and every discoloration or stain on the upholstery. Every crack in windows and even measure what is left on the tire tread. Does the timing belt need to be changed? When was the last oil change? Are the windshield wipers new or in need of replacement? You can sure assume the vehicle loan company will provide value of the vehicle as if everything is perfect on the vehicle. Declarations describing the condition of the vehicle and pictures showing the condition of the vehicle is essential. Then there are the vehicles currently being sold and advertised prices. There is what KBB and N.A.D.A. says about value and then there is the real world. Just because KBB says the retail value is one number does not mean the real world market agrees. Review advertisements for the sale of vehicles similar to your own. Are the retail advertisements higher or lower than what KBB or N.A.D.A. says your vehicle is worth? The bottom line here is to leave nothing out for the Bankruptcy Court to consider in determining the value of your vehicle.

A debtor may also wish to submit photographs of the vehicle and evidence as to the retail values of other like vehicles for sale by retail merchants in the debtor’s geographic area. Evidence of this nature will assist the court in determining whether an adjustment to the guide retail value is warranted.

At the very minimum include the following basic information:

(1) a description of the vehicle, including any options installed and special features;
(2) a description of the condition of the vehicle as of the petition date, including any damage, general deterioration, and past or necessary repairs;
(3) the vehicle’s mileage as of the petition date; and
(4) the age of the vehicle as of the petition date.