Most people need a car, either to get to work, to shop for groceries, to haul the kids around. If you live in Maryland or Virginia, you need a car, though less so if you live in DC. One of the questions I get asked all the time is, “Can I keep my car if I file for bankruptcy?”
Can I keep my car if I file for bankruptcy?
The answer to this question depends upon four main factors:
- Do you own the car outright, pay on a car loan, or lease the vehicle?
- Are you filing a Chapter 7 or Chapter 13 bankruptcy?
- Is your vehicle “exempt” under applicable bankruptcy law?
- What is the value of the vehicle and when did you buy it?
The bankruptcy automatic stay prevents creditors from collection activities, including repossession. Car loan servicers may not call you or otherwise attempt collection on debts while you are in bankruptcy. Instead, creditors must go through your bankruptcy attorney.
Do you own the car outright, pay on a car loan, or lease the vehicle?
Do you own your car outright (free and clear) or do you have a car loan? If you own the car outright (free and clear), your attorney must exempt the value of the vehicle using applicable exemption laws. The bankruptcy exemptions are addressed below.
If you have a car loan and want to keep the car, you may want to sign a reaffirmation agreement. This is a legally enforceable contract in your bankruptcy case that allows the car loan to pass through the discharge. Most lenders will insist that you sign a reaffirmation agreement. And most auto lenders will not send you monthly statements or report on-time payments to credit agencies unless a reaffirmation agreement has been filed. In some instances, lenders will simply repossess the car if you refuse to sign the agreement.
Reaffirmation agreements are strictly voluntary. Signing a reaffirmation agreement is a serious decision, and you should discuss with your bankruptcy attorney whether reaffirmation is in your best interests. Reaffirmed debts are not discharged, which means that the debt will survive the bankruptcy discharge.
If you lease a vehicle and file a Chapter 7 bankruptcy, you can either “assume” or “reject” the lease. If you assume (or keep) the lease, you will continue making the monthly payments and the lease will control. On the other hand, if you “reject” the lease, you must return the car to the creditor within 30 days of filing your statement of intention. If you surrender a leased vehicle, any residual debt will be discharged in your Chapter 7 bankruptcy case.
If you lease your vehicle and file a Chapter 13 bankruptcy, you can choose to either continue making the monthly lease payments or surrender the car back to the creditor. But your may owe a residual balance if your choose to reject the lease. The creditor will then file a proof of claim in your case for the balance of the lease due.
Are you filing a Chapter 7 or Chapter 13 bankruptcy?
If you file Chapter 7 and want to keep your car, be sure to remain current on your car loan prior to filing. If you are behind in your car payments when you file Chapter 7, the lender will move the court to allow it to repossess. This can quickly complicate the otherwise simple process of Chapter 7 bankruptcy.
In your Chapter 7 bankruptcy, you will file a Statement of Intention indicating whether you want to retain or surrender the vehicle. Either you will give up (surrender) the car and discharge the debt, or you will keep (retain) the car and continue payments. If you cannot afford the monthly payments on your car loan, then you should strongly consider surrendering the car. The auto loan balance will be fully discharged in your Chapter 7 bankruptcy.
If you are behind on your car payments, then Chapter 13 may be a better option for you. Chapter 13 bankruptcy protects your car from repossession and allows you to make up the missed payments through the Chapter 13 Plan. The amount you will ultimately have to pay for your car depends upon when you bought your car.
Is your vehicle “exempt” under applicable bankruptcy law?
Most Chapter 7 bankruptcy cases are “no asset” cases. That means that we can exempt your car from liquidation; the trustee will not confiscate and sell your vehicle. If there is little or no no equity in the car, the bankruptcy trustee will likely “abandon” the car, which means you get to keep it.
If you do have equity in the car over and above the value of the exemptions available, then you may be able to “purchase” the unprotected equity from the Chapter 7 trustee. Such agreements will be negotiated by your bankruptcy attorney.
Bankruptcy exemption laws protect certain amounts of value in your real and personal property. If the equity in an item of property is protected by an exemption, the trustee cannot take it. Here are the local vehicle exemptions:
District of Columbia:
DC Code Ann. § 15-501 – Motor vehicle to $2,575
Md. Code Ann. § 11-504(b)(5) – Property up to $6,000
Va. Code Ann. § 34-26 – $6,000 in motor vehicles
11 U.S.C. § 522(d)(2) – $3,675 for your motor vehicle
In Virginia and Maryland, you must use the state exemptions. In Washington, D.C., you may use either the D.C. or federal exemptions. Your bankruptcy attorney may be able to “stack” or combine exemptions, depending on the value of your other property and the availability of other exemption amounts.
What is the car’s value and when did you buy it?
There are two main online resources for determining the current market value of your vehicle: the National Automobile Dealers Association Guide and Kelley Blue Book. These websites will help you to establish the range of values for your car based on make, model, year, mileage, and condition.
- Newer car loans. If your vehicle loan is less than 910 days old, you will have to pay the full value of the car loan. However we may be able to negotiate a reduced interest rate, which could dramatically lower your monthly payment.
- Older car loans. If the car loan is older than 910 days, your bankruptcy attorney may file a motion with the court to “cram down” the loan to the value of the actual car. If a cram-down is available, you may only have to repay a prorated amount equal to the present value of the vehicle.
Negotiate with Your Lender
Auto lenders make their money on interest. Repossession is expensive, and auto lenders attempt to avoid it if possible. Most lenders would rather have you keep your car and continue monthly making payments instead of having to repossess it. Your bankruptcy attorney will often be able to use your bankruptcy as leverage in negotiations with your lender.
If you decide to surrender the car in your bankruptcy, you will be free of the obligation to pay for it. Bankruptcy, after all, is your legal right to a fresh start. That includes the ability to free yourself from a vehicle you can no longer afford.
In some cases, a vehicle just isn’t worth the loan. But if you want to keep your car when you file for bankruptcy, be open to your attorney’s objective analysis of how your vehicle fits into your financial circumstances and goals.