This is often the first question people ask during their bankruptcy consultation.
But, it is really two questions.
The first question is: “Can I exempt the equity in my vehicle using bankruptcy exemptions?” and
The second question is: “What options do I have for dealing with my vehicle loan in bankruptcy?”
We answer those two questions below.
NOTE: This discussion applies to Chapter 7 bankruptcy. The options are different for Chapter 13 bankruptcy.
When a person files Chapter 7 bankruptcy, they make a list of all their assets for the bankruptcy court.
They can keep their assets up to a certain dollar value. These limits are called “bankruptcy exemptions.”
If they have assets above and beyond the exemption amounts, the court could liquidate the “excess” assets to pay something back to the person’s creditors.
This rarely happens in California, where we have generous bankruptcy exemptions.
Most people can protect their vehicle equity using the California bankruptcy exemptions.
This means they are not in danger of losing their car when they file bankruptcy.
The bankruptcy code requires Chapter 7 bankruptcy filers to choose one of three options for secured debt on personal property like vehicles:
Redemption allows a person to “buy out” their current vehicle loan for an amount equal to the fair market value of the vehicle.
For example, if you owe $25,000.00 on a car that is worth only $15,000.00, you can make a motion to the court to pay $15,000.00 to satisfy the loan. The tricky part is coming up with the funds to pay off the loan.
This usually involves getting a “redemption loan,” which is often a loan charging very high interest.
For this reason, redemption is not practical for some people in Chapter 7 bankruptcy.
Most people in Chapter 7 bankruptcy choose between surrendering their vehicles and attempting to reaffirm their vehicle loans.
Personal liability for paying the vehicle loan is discharged in Chapter 7 bankruptcy unless it is reaffirmed. (More on this below.)
When you elect to surrender a vehicle, you return the vehicle to the lender. If you don’t do this voluntarily, the lender will repossess the vehicle, which can be an unpleasant experience.
If you elect to surrender the vehicle, you must keep your vehicle insurance and registration current until your lender picks up the vehicle.
Secured debts like vehicle loans consist of two “parts”: (1) the creditor’s right to sue you personally if you do not pay and (2) the creditor’s right to take back the vehicle if you do not pay.
Bankruptcy discharges your personal liability on most debts included in your bankruptcy.
Personal liability for paying a vehicle loan is usually discharged in Chapter 7 bankruptcy unless you reaffirm the debt.
When you agree to reaffirm a vehicle loan, you agree to “restore” your personal liability for the vehicle loan.
This means the creditor can sue you personally for the full amount of the loan if you reaffirm the debt and you become unable to keep up payments. So, reaffirmation is a big decision.
Generally, reaffirmation is not a good idea when (1) your expenses exceed your income or (2) the loan balance on the vehicle is large or (3) the loan balance exceeds the value of the vehicle.
Our goal is usually to try to negotiate a deal with the lender in which you keep the car without entering into a reaffirmation agreement.
Typically, you will continue making the same payments you made before the bankruptcy.
You will sometimes hear this referred to as “retain and pay.”
The lender always keeps the right to repossess the vehicle if you don’t make payments and make them 100% on time.
This right is unaffected by the bankruptcy, whether you reaffirm or not.
Your vehicle lender cannot report your post-bankruptcy payment history to the credit bureaus if you do not reaffirm the vehicle loan.
Some people see this as a reason to reaffirm– they want to rebuild credit and want their vehicle payment history to be reported to the credit bureaus.
Unfortunately, lenders often decline to report payment history even when a person does reaffirm a vehicle loan.
Lenders seem to be reluctant to report any post-bankruptcy history for a loan that has been included in a bankruptcy, even if the loan has been reaffirmed.
Credit reporting for post-bankruptcy consumers is complex, and the penalties for reporting incorrectly are steep.
Many lenders just delete the trade line from the consumer’s credit report or suppress post-bankruptcy reporting for the account.
So, if you reaffirm in order to receive credit reporting of your post-bankruptcy payments, you could be very disappointed.
You will want to consider whether the considerable risks of reaffirming are outweighed by the slight possibility you could receive positive credit reporting for your post-bankruptcy payments.
Give us a call at (805) 284-0760 to complete a free bankruptcy consultation. We will be happy to discuss all options and strategies for your vehicles in bankruptcy.