Residents of Southern California know and understand how indispensable their car is to their livelihood. They need a car to commute to work and to buy groceries. Life becomes exponentially more difficult without some mode of transportation. One of the most common questions we get is whether debtors can keep their car if they decide to file for bankruptcy. In most instances, a debtor can keep their vehicle. The important thing to know is when it comes to bankruptcy, a debtor has many options regarding their vehicle.
Keeping your car when you owe no balance
Under a Chapter 7 bankruptcy, most debtors who own modest cars and owe no balance on their vehicle are able to keep it by exempting the car’s equity. However, if a debtor owns several modest cars outright, he or she may experience problems trying to exempt the total equity of the vehicles. In such cases, it is best to hire an experience attorney to determine if any of the cars may be lost to bankruptcy. But losing a car to bankruptcy is rare, so this shouldn’t hinder anyone from considering bankruptcy.
Keeping your car if you owe a balance
If a debtor still owes payments on a car but wantsto keep it, the debtor can do one of three things:
1) redeem the car by paying the lender the fair market value of the vehicle under new loan terms,
2) reaffirm the original loan and keep the car under the same terms as the original car’s promissory note, or
3) in certain instances, just continuing making payments on the car.
Option 1 is viable if the debtor currently owes more on the car than its fair market value. A number of debtors go with option 2 if they feel that they can keep up with the payments. Under option 2, the debtor stays liable for the debt, but also continues to build credit on the debt. Option 3 is probably the best option for most debtors. However, some lenders will attempt to repossess the vehicle unless the debtor reaffirms the debt.
Surrendering your vehicle if you owe a balance
Another option for a debtor who still owes payments on a car is to simply surrender it. By surrendering the vehicle, the debtor would turn over possession of the vehicle to the lender, but would not be personally liable for the loan, even if there were a deficiency between the loan amount and the fair market value of the car.
If a debtor currently leases a car, his or her options are different. Under a Chapter 7 bankruptcy, a debtor with a car lease can either assume the lease or reject it. If the debtor assumes the car lease, he or she is agreeing the terms of the original lease. Under an assumption, the debtor may be exposed to repossession if lease payments are missed.
By rejecting the lease, the debtor is letting the creditor know that he or she does not intend to keep the vehicle. In this case, the creditor will usually seek to repossess the vehicle.
Another common misconception regarding cars in bankruptcy is that the debtor will immediately lose their vehicle upon filing bankruptcy. This is not the case. When a bankruptcy is filed, there is an automatic stay on all collection proceedings. This means that creditors cannot take any action to collect on what is owed, or repossess any secured property. If the debtor is behind on the car payments, but has the intention of retaining the car, then the debtor should make up the missed payments as soon as possible. This is because creditors can file a motion to lift the automatic stay, essentially requesting from the Bankruptcy court permission to repossess the car. But even if the debtor does not intend to keep the vehicle, there is usually some time spent on coordinating the pick-up of the car between the creditor, the debtor, and the Orange County bankruptcy attorneys.
Ultimately, a debtor has many options when it comes to vehicle when filing bankruptcy. Feel free to contact our office to see what you can do regarding your vehicle.