Keep Your Car After Bankruptcy

Stop Repossession

Keeping your car after bankruptcy is possible with Chapter 7 or Chapter 13 bankruptcy.  Chapter 13 bankruptcy may allow you to stop repossession by forcing the creditor to change the loan payment terms. In addition, if you bought your car more than 910 days before filing Chapter 13, you may be able to force the lender to accept less than the balance owed on the car. When the loan is more than 910 days old, the creditor must accept a payoff equal to the fair market value of the car. This procedure is called “cramming down” the loan.  If you purchased your car less than 910 days before filing Chapter 13 bankruptcy, you won’t be able to “cram down” the loan. However, in all Chapter 13 bankruptcy cases you will get five years to pay off your vehicle, at a reduced interest rate.

Reaffirmation Agreement

Chapter 7 cases do not allow you to “cram down” an automobile loan. Instead, you will be required to sign a reaffirmation agreement on the debt in order to keep the vehicle. Reaffirmation agreements require you to keep paying the regularly monthly payments on the vehicle under the terms of the original contract. When you reaffirm a debt, you will be responsible for the debt after receiving a Chapter 7 bankruptcy discharge. Be careful about reaffirming a debt. If the vehicle is repossessed after your bankruptcy, you might be liable for a deficiency claim if you signed a reaffirmation agreement.

Top 5 Benefits of Bankruptcy

  1. Stop Debt Collectors and Lawsuits With an Automatic Stay: One of the top benefits of bankruptcy is the automatic stay, which stops all collection activity in its tracks. An “automatic stay” is a bankruptcy court order that prohibits creditor phone calls, demand letters, repossession, lawsuits, foreclosure, or garnishment. This court order also prohibits the threat of any collection activity. In most cases, the only way a creditor can lift the automatic stay is with permission from the bankruptcy judge. The automatic stay goes into effect the minute your case is filed, and is a powerful tool that protects you during your bankruptcy case.
  2. Keep Your Property Using Exemptions: Many clients are surprised that the bankruptcy code doesn’t require debtors to give up all of their property.  In fact, most clients keep all of their property after filing bankruptcy Under Chapter 7 and Chapter 13. The bankruptcy code says that you are entitled to claim as exempt several categories of property, within certain dollar limits. Exemptions are categories of property that the law says you can keep after the bankruptcy case is finished.  For example, a single person is entitled to a homestead exemption in the amount of $22,975.00 on their home or other personal property used as a residence.  A couple is allowed to double the exemption amount and retain $45,950.00 worth of equity in their home or personal property used as a residence. Other exemptions exist to protect household goods and furnishings, vehicles, jewelry, tools of the trade, clothing, life insurance, and other items. An experienced bankruptcy attorney can help you keep the maximum amount of your property allowed by law. In addition, retirement accounts enjoy special protections under the bankruptcy code.  Before you decide to liquidate your retirement to pay creditors, see if a bankruptcy lawyer can protect the account by filing bankruptcy. In most cases, an IRA, 401k, pension plan, or other retirement account will be protected if you file bankruptcy.
  3. Stop Foreclosure and Repossession: Filing bankruptcy may help you stop a foreclosure or repossession. Under Chapter 13 bankruptcy, your attorney will help you prepare a plan of reorganization to “catch up” missed payments over time, typically three to five years. For example, suppose you are behind on your mortgage by six months, and the monthly payment is $1,000.00 per month.  The total amount of past due payments under this scenario would be $6,000.00, which might be impossible for you to catch up before a foreclosure sale of your property. Under Chapter 13 bankruptcy, you can propose a plan of reorganization that pays off the $6,000.00 in missed payments over a five-year period.  In that situation, the mortgage could be brought current with payment of the regular mortgage amount plus an additional $100.00 per month.  (60 months x $100.00 = $6,000.00.)  In this example, stretching out the repayment of the past due balance over time would allow you to keep your home with a manageable repayment plan. After the bankruptcy case is over, you would resume regular payments to your mortgage company. Finally, assuming you qualify for Chapter 13 bankruptcy and make all of your plan payments, you will be able to emerge from bankruptcy with a discharge of your remaining unsecured debts. A discharge order permanently extinguishes the remaining indebtedness owed to most unsecured creditors after your bankruptcy case. To qualify for Chapter 13 bankruptcy, you must have a source of regular income and be willing to commit a portion of your monthly income to a Chapter 13 plan of reorganization. An experienced bankruptcy attorney can help you decide whether Chapter 13 bankruptcy will help you in your particular situation.
  4. Business Owners and High-Income Earners Are Often Eligible for Chapter 7 or 13: High income earners can benefit from filing bankruptcy. Sometimes clients don’t call a bankruptcy lawyer because they think they make too much money or will have to give up everything they own. Despite the changes in the law in 2005, many people with high income are still eligible for Chapter 7. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), required most people to fill out a complicated “means test” form. On the means test, your household income for the six months preceding filing is compared to the average income of the same household size in the county where you live. If your household’s gross average income in the six months before filing bankruptcy is less than the average monthly gross income for a household of a similar size in the county where you live, then you will be eligible for Chapter 7. If your household gross income exceeds the median household income for a family of a similar size, then the “means test” allows deductions from gross income such as taxes, secured payments on debts that will be due over the next sixty months, and other living expenses. After subtracting all of the allowable deductions from the six month gross average income, your attorney will be able to determine whether sufficient funds are left over to pay some portion of your unsecured debts. If a debtor passes the means test, Chapter 7 bankruptcy is available. If the debtor does not pass the means test, the debtor may still be eligible for Chapter 13 bankruptcy. High income earners may still be eligible for Chapter 7 bankruptcy even if they would “fail” the means test. For example, if a person’s debts are primarily “non-consumer” debts, then the person is not required to pass the means test and will qualify for Chapter 7. Consumer debts are debts incurred primarily for household purposes. If more than 50% of a person’s debt is non-consumer debt, such as business loans, business related credit card debt, or other trade debt, then the person is not required to pass the means test in order to be eligible for Chapter 7 bankruptcy. This statutory provision can be very helpful to people who have business loans or personal guaranties, and are seeking a fresh start. An experienced attorney can help you decide if Chapter 7 bankruptcy might still be an option, even if you are a high income earner.
  5. Bankruptcy is Quicker and Less Expensive than Debt Settlement: Debt settlement companies often make a bad situation worse.  Over the years, I have met with many clients who have told me that they tried to settle their debts using a debt settlement firm or debt negotiation company. These companies advise the client to stop paying their credit cards, stop accepting phone calls from creditors, and to refer all such calls to the debt settlement company. In addition, these companies often require monthly automatic bank drafts from the person’s checking account to pay debt settlement fees and to build up a reserve account. The reserve account is supposed to be used by the company to try to settle each of the client’s debts in a lump sum payment. This process is often accompanied by a promise that the debt settlement company will be able negotiate a settlement whereby the creditor will likely accept pennies on the dollar to settle the debts. This strategy of stopping payments on credit cards and referring calls to a debt settlement company has serious detrimental consequences. First, stopping all credit card payments causes the client’s FICO credit score to plummet. The debt settlement companies know this, and use the damage to a person’s credit as a tool to help them negotiate with credit card companies. Meanwhile, the credit card companies tack on late fees, put the account in default, and raise the interest rate to the default rate. This process causes a sharp increase in the balances owed on credit cards. In my experience, the debt settlement companies don’t deliver the promised results. Nothing in the debt settlement process stops a credit card company from filing a lawsuit. Unfortunately, by the time a client has contacted my office, they have already paid $4,000.00 to $5,000.00 to the debt settlement company. In addition, very few of the debts have been successfully settled, and the client is facing a lawsuit or garnishment. In most cases, the client could have contacted an attorney to see if the attorney could help them settle their debts, or determine if bankruptcy would be a better option.  In some cases, the development of a strict family budget and help from an attorney negotiating on their behalf can keep a client from being forced into bankruptcy.