Cars in Bankruptcy

Cars in Bankruptcy.  In a Ch 7 bankruptcy, most people do not lose their cars.  Of course, if you want to get rid of your car and stop making payments, you can do so in a Ch 7 bankruptcy.

You can keep your car if you can show that you need it, that you can afford it, and that you have a limited amount of equity in it.

Showing a need for a car is easy. Nearly everyone needs a car.  Not everyone needs a luxury car, though, so if your monthly payments are too high because your vehicle is “fancy”, that could be an issue.  In Eastern NC, it is generally acceptable to have a monthly car payment of $500 or less.

Showing that you can afford to pay for the vehicle depends on your monthly income and expenses. Put simply, does your budget show that you can afford your car payment?

In Chapter 7 you are allowed $3,500 equity in a vehicle for each owner (the person on the vehicle title). On top of this, filers may be allowed an additional $5,000 equity per owner, depending on what other assets the person owns.  This is complicated, so contact Cameron Law if you have questions about your specific situation!

Automatic Stay for a Vehicle in a Ch 7 Bankruptcy

If you are making payments on a vehicle when you file a Ch 7 bankruptcy, a protection called the “automatic stay” comes into effect.  The automatic stay means no one can sue you or try to collect money from you without permission from the bankruptcy court.  This means the creditor for your vehicle loan may stop billing you and may stop accepting your payments (temporarily). This does not mean you don’t owe the vehicle creditor money. If you want to keep your vehicle, you need to make your regular monthly payments.

Some vehicle creditors will not accept payments while your Ch 7 bankruptcy case is open. This is because they interpret the law with an abundance of caution. If your vehicle creditor will not accept your payments while your case is open, save the payment money in your bank account, and pay the vehicle creditor as soon as they will accept payments again. Do not spend the money, mistakenly thinking you do not owe it.

Vehicle Loan in the Chapter 7 Bankruptcy

“But I didn’t want to include my vehicle loan in the bankruptcy…?”  This is a common misunderstanding.  You cannot omit any debts from your bankruptcy case.  By law, all creditors/debts must be listed or “included.”  This does not mean that you are giving up your vehicle.  It means you have to list the debt, and the creditor must receive notice of the bankruptcy filing.  When the vehicle creditor won’t accept your payment (temporarily) or says you need to sign a reaffirmation agreement, do not panic.  This does not mean there is an error. This does not mean you are losing your vehicle.

Reaffirming a Car Loan 

Bankruptcy cancels your personal legal obligation to pay a debt, even a secured debt like a vehicle loan. This means the secured creditor can’t sue you personally after a bankruptcy to collect the money you owe.  BUT the creditor can still take back their collateral if you don’t pay the debt. In other words, if you don’t pay the car payments, the vehicle creditor will repossess the vehicle post-bankruptcy.

For secured debts, you have the option to sign a written agreement to “reaffirm” the debt. If you choose to reaffirm (aka “sign a reaffirmation agreement”), you agree to be legally obligated to pay the debt despite the bankruptcy. Typically, you have to reaffirm a vehicle loan in order to keep the vehicle.  Not all creditors require this, but most do.  If you file your case in the Eastern District of NC, there is a court case that allows your attorney to mark out language in the reaffirmation agreement you sign, so that you comply with your obligation to “reaffirm” the debt without personally obligating yourself to pay it.  This allows you to “have your cake and eat it, too”.  The downside to this option is that the creditor typically will not report your payment history to the credit bureaus going forward.  The upside is that you are protected so that if you can’t afford to keep paying for the vehicle, or something happens and you don’t want to keep the vehicle, the vehicle creditor cannot sue you to collect a deficiency balance.  We can talk about what is the right option for you.