Automobiles and Bankruptcy
November 4, 2022
You are considering Bankruptcy. What will happen to my car?
CHAPTER 7. I OWE MONEY ON MY CAR. WHAT DO YOU WANT TO DO?
There are four (4) options:
- You can reaffirm the debt. Assuming you are up to date on your note, you can reaffirm. You continue to pay your monthly payments. Remember, the finance company doesn’t want your car. They want your money.
- If you reaffirm your car note, you will no longer have bankruptcy protection. If you fall behind, the finance company can repossess and sue you for a deficiency.
- Redemption. Let’s say you owe $15,000 on a car with a retail value of $8,000. You can get a court order: you give them $8,000, and they give you the title to the car.
- Hey, I don’t have $8,000. Some companies that will finance the Redemption. Of course, you have to show them you can repay the loan.
- Surrender. The car is not worth keeping. You can give the back and owe nothing.
- Some dealers who will sell and finance a replacement car immediately upon filing Chapter 7. Again, you have to show them you can repay the new loan.
- Don’t reaffirm but continue your car payments.
- If you fall behind after the discharge, the finance company can repossess the car; but, you owe nothing.
- This option is risky. Some finance companies have a policy to repo a car after discharge if the loan is not reaffirmed.
CHAPTER 13. HOW DO I HANDLE A CAR LOAN WHEN I FILE CHAPTER 13?
Here are some of the options
- You pay the full balance of the loan through Chapter 13. You have up to five (5) years to pay it. Usually, the interest rate in Chapter 13 is lower than the contract rate.
- You are current on the car note. If it works in your budget, you continue to pay the car note directly.
- You are behind on your note, but you can continue to make your monthly payments. The, you continue with your monthly payment and pay the arrearage through the Chapter 13 plan.
- The car is not worth keeping. You can surrender the car. The balance you owe will be general unsecured debt. Hopefully, you will pay them something like ten cents on the dollar.
YOU OWN A CAR FREE AND CLEAR.
The question is: What is the value of the car? Not the retail value but the trade-in value.
- In Illinois, you have two (2) exemptions. First, $2,400 for one car. Second, the unused part of your $4,000 personal property exemption. These exemptions double if the car is both a married couple’s name.
- If your car’s the trade-in value is less than about $8,000, you can keep your car if you file Chapter 7. If you file Chapter 13, it will not affect your plan payment.
- What if I have two (2) or more cars? The $2,400 exemption can only be used for one car. The unused part of the $4,000 exemption is available.
- If you have a very expensive car, you should not file Chapter 7. If you still need help, consider filing Chapter 13.
A COUPLE OF OTHER THINGS ABOUT CARS IN CHAPTER 13
- In Chapter 13 is it possible to only pay the Retail Value of the car and not the full balance?
- If you bought the car more than 910 days before filing your Chapter 13;
- Your loan is a Title Loan. You had the title, and you got a loan on it.
- You can prove the car is not for your personal use. For example, the car is driven by a son or daughter away at college.
- If you have equity in the car over and above allowed exemptions, you have to pay that amount for the benefits on general unsecured creditors. It could increase the dividend to unsecured creditors. It depends on the math.
- You filed Chapter 13 to save the car, and now it is not worth saving. If you qualify for Chapter 7, you can convert the Chapter 13 to Chapter 7. You give up the car and owe nothing.
- You have a co-signer on the car loan- a couple of things. In Illinois, we don’t have co-signers: we have co-buyers. Assuming you want to protect the co-buyer, your Chapter 13 will do so.