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.
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.