Can I Keep My Car If I File For Bankruptcy?
The vast majority of people who file for bankruptcy protection are able to keep their primary vehicle. Those with multiple vehicles may be able to keep all or may only be able to keep some or one, depending on their intent, the vehicles in question and the debt against them. They are able to do so because, given their circumstances, they select the right chapter of bankruptcy to file, treat the debt on the property appropriately and claim their exemptions correctly. The guidance of an experienced bankruptcy attorney will ensure that your home is protected when you file.
Determine Value
To begin with, the proper value for each vehicle must be determined. There are multiple ways to determine the value of the vehicle. Each jurisdiction has adopted a method that is presumed to be reasonable, commonly including the National Auto Dealer’s Association (NADA) value, the Kelly Blue Book (KBB) value or something similar. These are easily obtained online with the year, make, model, mileage and condition of the vehicle. In some cases, a more specific valuation may be needed. A vehicle that is significantly customized, collectible or rare may require an actual appraisal from a recognized expert.
Determine Debt
Once the value is determined, then you turn to any debt against the vehicle. This is usually the balance of the car loan but also includes title loans or other personal loans where the vehicle was pledged as collateral against the loan. In the case of title and personal loans against a vehicle, your bankruptcy attorney will take the extra step of ensuring that the lender followed all of the necessary steps in your state to perfect the lien against the title of the vehicle. If they did not, the attorney may be able to remove (strip) the lien from the vehicle.
Determine Exemptions
Finally, you must determine what exemptions are available to protect any equity in the vehicle while in bankruptcy. Exemptions vary significantly from state to state, with some adopting the federal exemptions and many others opting to use their own state exemptions. The federal exemptions include a specific exemption for a motor vehicle and most states likewise have their own. Some states also allow you to “stack” exemptions, using portions of unused personal property exemptions on motor vehicles. Maximizing exemptions is vital in bankruptcy and something your bankruptcy attorney is well-versed at.
Determine Net Equity
With these three factors, the calculation for determining net equity in the vehicle is relatively simple. Take the vehicle value, subtract the balance of any perfected debts against the vehicle, then subtract the applicable exemption amount. If the result is a positive number, then you have net equity in the vehicle. If not, then you do not. A simple example is if you have a truck worth $30,000, you owe $25,000 on an auto loan and have a $5,000 motor vehicle exemption you can claim. In this case, your net equity is zero.
It is worth noting that a motor vehicle is generally a depreciating asset, meaning that it loses value over time. In fact, if you purchase a brand new vehicle and drive it off of the dealer’s lot, you generally lose ten to twenty percent of the value of that vehicle simply because it is now “used”. Unless a significant downpayment is made at the time of purchase, most new car loans are “underwater”, meaning that the value will remain below the balance of the loan for the majority of the repayment period. Oddly enough, this often works to your benefit in a bankruptcy case because there is never any equity to address.
Net equity is one of the factors to consider when deciding what chapter of bankruptcy to file for, but it is far from the only one. It is also very important to determine what your intent is with regard to the vehicle. In either Chapter 7 or Chapter 13, you have the right to surrender the vehicle back to the lender. They will pick up the vehicle and sell it in a commercially reasonable manner (usually at an auto auction). All proceeds will be applied to the balance of the loan and any remaining balance will be treated as an unsecured debt in the bankruptcy and discharged at the end of the case. Rarely are there any excess proceeds, but if there are, they will be paid to you.
If you want to keep the vehicle, then we turn to where you stand on your debt payments. If you are current, you likely have multiple options available to you. If you are behind, however, Chapter 7 bankruptcy is a risk and Chapter 13 will be the safer option. It is also worth noting that you must be in compliance with other terms of the financing agreement with the lender when you file, which usually means that you must have insurance current and maintained on the vehicle.
In Chapter 7, a paid in full vehicle is treated just like any other asset. The trustee will look at the value of the vehicle and look at the amount of the exemptions claimed on it. If there is positive equity, the trustee will have the right to sell the vehicle and use the proceeds to pay down your other creditors. The amount of equity is significant here, as is the total amount of debt that you have, as most trustees will not sell a vehicle when the proceeds will only pay the creditors a nominal amount. If there is enough equity to make what they determine to be a significant distribution to creditors, however, the trustee can and will sell the vehicle.
If the vehicle has debt against it, then the Chapter 7 trustee will again make a determination of net equity. If there is significant equity, even if the vehicle is financed, the trustee will liquidate it, paying off the debt against the vehicle, paying you your exempted amount and then paying the rest of the creditors out of the remaining proceeds. If there is not, then the trustee will abandon the vehicle back to you and you will have to address the debt. This is the case with the vast majority of financed vehicles in Chapter 7, as most are worth far less than what is owed on them. At this point, you have to decide how to move forward. You can:
- Reaffirm the loan – this simply means that you agree to continue making payments on the vehicle and you sign an agreement, the reaffirmation agreement, that states that you will remain personally liable for the debt after the bankruptcy is discharged. This is very common in Chapter 7 cases, as most people who file want to keep their financed vehicle and most lenders require a reaffirmation agreement to do so. Keep in mind that the court will have to approve your reaffirmation agreement and will only do so if they believe that you will actually be able to keep up with the payments after your bankruptcy is over.
- Redemption – Chapter 7 contains a provision, Section 722, that allows you to purchase the vehicle at its current value from the bankruptcy estate from the lender. This can be very beneficial given the way that vehicles tend to depreciate (lose value) very quickly. If you owe $30,000 on the vehicle but it is only valued at $20,000 then you can redeem the vehicle for the $20,000 and the remaining $10,000 is discharged. Now, if you are filing for Chapter 7, you likely do not have $20,000 to “buy back” your vehicle, but there are several very reputable companies that will finance this redemption value for you. If you have an underwater vehicle, you should ask your attorney about this option.
- “Ride Through” – this simply means that you continue to make your car payment through and after the bankruptcy, but do not execute a reaffirmation agreement. For many, this is preferable because your personal liability on the loan is discharged in bankruptcy and never gets reinstated, so if the car is repossessed or surrendered later, the lender cannot collect from you. Several lenders, however, will not allow this and instead will repossess the vehicle immediately after bankruptcy to avoid future risk, even if you are paying consistently.
You must also note that if you are behind in your vehicle payments, Chapter 7 bankruptcy will generally not help you catch them up. Past due amounts will remain past due until you pay them. The lenders can seek the protection of the Automatic Stay of Bankruptcy be removed (lifted) for them so that they can repossess the vehicle. The exception to this is if you file for Chapter 7, then seek to redeem the vehicle. Then it doesn’t matter that you are behind because you are buying the vehicle back from the bankruptcy estate anyway. This may result in a race to the courthouse however, so ensure that you are ready with a motion to redeem as soon as the case is filed and before the creditor can file their motion to lift the Automatic Stay.
Chapter 13 provides a few more options, along with a few more complexities. If your vehicle is paid in full and you file for Chapter 13, then it is treated like any other asset. A net equity value is determined and, if there is positive net equity, then that amount must be paid to unsecured creditors at a minimum in your Chapter 13 plan. It does not matter if the vehicle is necessary to you or is a luxury item, as there generally are not significant costs associated with it, it is just an asset with value. Many people file for Chapter 13 simply because they have a second car, motorcycle, boat, etc. that has value that they do not want to lose in Chapter 7.
The significant benefit of Chapter 13 regarding vehicle loans is that you can protect a financed vehicle where payments are past due by including the vehicle and lender in the Chapter 13 payment plan. The Automatic Stay of Bankruptcy is powerful enough that it even can require that a vehicle already repossessed must be returned to you, so long as it has not yet been sold at auction, upon the filing of the case. How the debt is treated in the Chapter 13 plan is important and you again have options:
- Cure & Maintain: You do have the right to maintain your current monthly payment to the lender upon filing the bankruptcy and include any missed payments in the Chapter 13 plan. You are required to keep the monthly payments current after the case is filed and the Chapter 13 trustee will catch up the past due payments (arrears) over time from the monthly payments you make to them. This is often used when the loan repayment term is longer than the Chapter 13 plan and with 72 and 84 month vehicle loans becoming more common, so will this Chapter 13 plan treatment.
- Pay in Full: In 2004, Congress substantially changed the Bankruptcy Code with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). When they did so, they added a very odd and random provision known as the “hanging paragraph” of Section 1325. This random provision states that if you financed your vehicle within 910 days of the filing of a Chapter 13 bankruptcy and the vehicle is used predominantly for consumer (not commercial business) purposes, then you are not allowed to reduce the principal balance owed on the vehicle. This was a significant change that did nothing but hurt consumers. That said, if this is your situation, you will be required to pay the full balance of the car loan within your Chapter 13 plan. You can modify the interest rate, usually reducing it to a level that is the Prime Rate plus a risk factor of 1-3%, depending on your situation, but the full balance must be paid. At the end of your Chapter 13 plan, you will receive title to the vehicle upon discharge.
- Cramdown: If your vehicle was financed more than 910 days after the bankruptcy filing, or if the car is used primarily for commercial purposes (shouting out to all gig drivers for Uber, Lyft, Door Dash, pizza delivery, etc.), then you can cramdown the loan. This simply means that you only must pay back the value of the vehicle at the time of filing with interest in the Chapter 13 plan. The remaining balance of the loan will be treated as an unsecured debt and at the end of the plan, the vehicle will be paid off and you will receive title.
- Surrender: As stated above, you always have the right to propose a plan that gives the vehicle back to the lender. Any debt remaining after the vehicle is sold is treated as an unsecured debt and discharged at the end of the bankruptcy.
Reasonable and necessary for an effective reorganization is a phrase often associated with financed vehicles in a Chapter 13 case, but it can also be raised in a Chapter 7 case. If you have multiple financed vehicles and the trustee believes that one or more are not necessary for you to effectively reorganize, they may object to your plan that includes keeping and paying them all off. I practiced in the Midwest and had several clients who were financing their primary automobile and financing a motorcycle/fishing or pleasure boat/off road vehicle. In a Chapter 7 case, if the costs associated with the additional financed vehicle were eliminated and that would allow the debtor to pay a significant portion of their other debts, the trustee might object. More commonly, in Chapter 13, if a repayment plan was proposed that paid off these other vehicles but did not pay unsecured creditors in full, I knew I would get an objection and must be ready to argue as to why the additional vehicle was necessary. This is not limited to the Midwest, as I have heard the same from attorneys across the country.
