Today's difficult economy has caused many people to think about bankruptcy protection. One of the most stressful aspects of filing bankruptcy, however, concerns which assets can be kept and which possessions may need to be given up. When it comes to cars, you may have options.
There are two types of personal bankruptcy that are generally available for consumers. Chapter 7 or Chapter 13 bankruptcy may guide you to a fresh, financial future. Most people go with Chapter 7 because it’s designed to help get rid of credit card bills, unpaid medical debt and other loans.
If you own your car outright, or have significant equity in your car, whether you will be able to keep it or not depends on your state laws for exemptions.
Exemptions are protections from the bankruptcy court, and are outlined by each state. Most states allow a Chapter 7 bankruptcy filer to keep a car, typically up to a certain value, as a car is often crucial to rebuilding a successful financial life after bankruptcy.
However, if you have a car that is above your state's exemption amount, or have several cars, the bankruptcy court may be able to seize it and sell it, with the proceeds going to your creditors. A bankruptcy attorney in your area can help you assess the likelihood of this happening.
If your car is collateral for a loan or lease, the situation is different. Because the loan may be a debt that is eligible to be discharged in bankruptcy, you'll need to decided if you want to keep the car and the debt beyond bankruptcy, or eliminate the debt and give up the car.
If you decide that Chapter 7 is best, there are three options for your car loan:
By reaffirming, it means you acknowledge your debt still exists and you'll continue to pay off the loan until this obligation has been fulfilled. This option can allow you to retain your vehicle, but if you miss a single payment, your car could get repossessed, which may damage your credit beyond a bankruptcy filing.
If you choose to surrender your automobile, you'll return the car to your creditor and may be able to include the remainder of your debt in your bankruptcy filing, which could eliminate the payment obligation.
The third option under a Chapter 7 filing is to redeem the car. In essence, this choice requires that you pay off your car in one lump sum. This could allow you to keep the car, and not have any further debt obligation.
Chapter 13 bankruptcy, also known as the Wage Earner's Plan, calls for you to pay off some or all of your debt over a period of three to five years.
In Chapter 13, the court typically will not seize any property, regardless of its value. Therefore, you should be able to keep any cars that you have.
When it comes to car loans under this form of bankruptcy, the age of your car loan can often determine the bankruptcy court's determination of what you will owe on your vehicle.
If your car loan was originated less 910 days before filing, you may be required to pay off the full balance of your car. But if you are responsible for a loan older than 910 days (approximately 2 and a half years), the court may examine the car's current fair market value and put together a prorated payment plan. Then you might only be obligated to pay for what the car is worth in today's marketplace, if that is less than what you currently owe the lender.
To learn more about how your state's bankruptcy laws could affect your ability to keep your car, connect with a local lawyer today.