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Middletown, New York Lawyers Discuss Bankruptcy and Car Loans

Most bankruptcy clients own at least one automobile and are very concerned about how it will be affected by their bankruptcy. Some vehicles are owned “free and clear” of any lien, while others are subject to Car Loans. In a bankruptcy petition, you must list ALL of your assets and ALL of your debts. Accordingly, all motor vehicles that you own must be disclosed as assets and listed in your bankruptcy, and any Car Loans that you have must also be disclosed and listed as debts. Many factors determine the fate of a motor vehicle in bankruptcy, as follows:

  • If the value of a particular vehicle is exempt and it is not subject to any Car Loans, it will not be affected by the filing of either a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy. You simply keep the vehicle.
  • If a vehicle is free and clear of liens but is not fully exempt (because its value greater than the available exemptions), the Chapter 7 Trustee may try to administer (i.e. sell) the car. If you want to keep the vehicle, you will have to buy it from the Trustee. If you do not have funds to do this, you might not want to be in Chapter 7. You should thoroughly discuss this issue with your bankruptcy lawyer.
  • If a particular automobile is subject to a Car Loan, the options available in a Chapter 7 Bankruptcy differ from those available in a Chapter 13 Bankruptcy. The options are:

Car Loans in Chapter 7 Bankruptcy

  • Surrender the vehicle to the auto lender if you no longer want it or can no longer afford it. You will obtain a Discharge of your obligation to repay the Car Loan, the auto lender will repossess the car and you will no longer have (a) a car payment or (b) a car. If you need a vehicle for transportation, you will have to make alternate arrangements such as getting an affordable used car.
  • Reaffirm the Car Loan by entering into a Reaffirmation Agreement with the auto lender AND continuing to make your required Car Loan payment. Be mindful that a Reaffirmation Agreement makes your obligation to repay the Car Loan survive the bankruptcy. This can be a huge problem if you subsequently default on the loan and the vehicle is repossessed. Even though you filed bankruptcy, you will remain liable for any deficiency judgment after the vehicle is sold at auction.
  • Redeem the vehicle by obtaining a Bankruptcy Court Order authorizing you to make a one-time, lump sum payment to the auto lender of the Retail Value of the automobile. The Car Loan is discharged once the Court-authorized payment is made. This option only helps if you have access to exempt funds that are beyond the reach of the Chapter 7 Trustee.
  • Continue to Pay your Car Loan but do not enter into a Reaffirmation Agreement. This option is risky, and we rarely recommend it, but if you get away with it, you keep the vehicle without any personal liability on the Car Loan. However, if a debtor refuses to enter into a Reaffirmation Agreement when requested to do so by the auto lender, the law allows the auto lender to repossess the vehicle for that reason alone-even if the debtor is making their payments. The auto lender is not required to repossess the vehicle in this circumstance, but if they want to (1) they can and (2) the debtor cannot stop them. There is a major “risk-reward” element at play when proceeding in this fashion. As Dirty Harry (Callahan) might say, “Do You Feel Lucky?”

Car Loans in Chapter 13 Bankruptcy

  • If you are current on your Car Loan payments and want to keep the vehicle, Continue to Pay the Car Loan directly to the auto lender, just as you did prior to the bankruptcy filing. This is called making your payments “outside the Plan”.
  • If you are behind in your Car Loan payments but want to keep the vehicle, Continue to Pay the Car Loan directly to the auto lender “outside the Plan”, just as you did prior to the bankruptcy filing. However, your past-due Car Loan payments must be paid to the auto lender by your Chapter 13 Trustee from the monthly Plan payments that you make to the Trustee.
  • Surrender the car to the auto lender if you no longer want it or can no longer afford it. The auto lender will repossess the vehicle and you will no longer have (1) a car payment or (2) a car. It is very difficult to obtain a Car Loan when in an active Chapter 13 case, so if you need a vehicle for transportation you had better have a plan to address this need.
  • A Cram Down/Strip Down of a Car Loan can occur if certain factors exist, including (1) whether the car is worth less than the amount owed on it, (2) whether the number of payments left on the Car Loan is less than the length of the Chapter 13 Plan, and (3) whether the Car Loan is a Purchase Money Security Interest (“PMSI”). A PMSI is a Car Loan where the loan proceeds were used to purchase the car. When dealing with a PMSI another critical factor is whether the car is a “910 Car”, meaning that the PMSI Car Loan taken out within 910 days of the bankruptcy filing.
  • If the Car Loan (1) is not a PMSI (i.e. a car already owned by you gets used as collateral for an unrelated loan), or (2) is a PMSI but is not a “910 Car”, the amount owed on the Car Loan can be Stripped Down to the actual value of the vehicle (assuming that it is less than the amount owed on it) and paid over the life of the Chapter 13 Plan (up to 5 years) at a potentially reduced interest rate, commonly referred to as “Till interest” (after a Supreme Court case where one of the litigants was named Till). In this scenario, you make no payments directly to your auto lender. Rather, the auto lender gets paid by your Chapter 13 Trustee from the monthly Plan payments you make to the Trustee. Although this sounds wonderful, it can be risky. If you are not making Car Loan payments and your Chapter 13 case gets dismissed, your Car Loan is immediately in default as soon as you exit Chapter 13. Before attempting this, it should be thoroughly discussed with your bankruptcy lawyer.
  • When dealing with a “910 Car” you CANNOT Strip Down the Car Loan to the actual value of the car but you can Cram Down certain modifications to its repayment terms. The Car Loan can be paid over the life of the Chapter 13 Plan (up to 5 years), which is probably a longer period than is remaining on the actual Car Loan. In addition, the Car Loan can be repaid at “Till interest”, which is presumably less than the contract interest rate. These two factors can lessen the burden of the car payment on your budget. However, as with a Strip Down, you make no payments directly to your auto lender in this scenario, with the auto lender getting paid by your Chapter 13 Trustee. Once again, proceeding in this fashion is risky, because if your Chapter 13 case gets dismissed your Car Loan is immediately in default as soon as you exit Chapter 13. Before attempting this, it should be thoroughly discussed with your bankruptcy lawyer.