Can I keep my car in bankruptcy?
We’ve heard the question more times than you’ve cursed the traffic on our Island roads and highways. And we understand why: Next to our homes, our cars are our most precious material asset. We count on them to get us to work, to haul our groceries, and to carry our most precious assets of all — our kids.
The fear of having to give up a safe, dependable and comfortable vehicle is enough to keep some people from even inquiring about the possibility of filing bankruptcy. Such fears are almost always unjustified, though. In the vast majority of cases, you can keep your car — even multiple cars — in bankruptcy. What’s more, for many bankruptcy filers, it is even possible to retain a vehicle on more favorable terms than the car loan provides.
First of all, let’s dispense quickly with the idea that the bankruptcy judge is going to demand that you hand over the keys to Old Betsy before he grants your bankruptcy discharge. Remember, the whole idea of the Bankruptcy Code is to provide a fresh start to the “honest but unfortunate debtor.” Congress and the courts understand that a car is essential to most people’s livelihoods and to getting that fresh start. There are generous exemptions that protect cars and other essential items of property, up to certain values, from being liquidated by a bankruptcy trustee. Rarely in our practice do we encounter an individual who is unable to exempt the full value of their vehicle. And when we do, the Bankruptcy Code offers other options for retaining the vehicle, including filing a chapter 13 bankruptcy case where no property is ever liquidated.
One of the worst mistakes a person can make is to transfer their car title to a friend or relative soon before filing bankruptcy in hopes of avoiding having the car sold by a bankruptcy trustee. The bankruptcy trustee has the power to undo such transfers, and when he or she does, the bankruptcy filer most likely will lose the exemptions that would have protected the car from liquidation had the transfer not occurred.
If you are still paying the bank for your car and want to keep it, the Code gives you several options for doing so. One attractive but rarely used option for those who are upside down on their car loans — as most borrowers are — is to “redeem” the vehicle in a chapter 7 case by paying the lender the fair market value of the car and discharging the balance through the bankruptcy case. Since this requires a lump sum payment, few bankruptcy filers are able to take advantage of this option, but we are pleased when circumstances allow for it.
In a chapter 13 case where the car loan was taken out more than 910 days before the filing of the bankruptcy case, the loan can be modified so that the principal is reduced to the current retail value of the car and is paid over a three to five-year period at an interest rate that presently stands at 4.75 percent. Even newer car loans can often be modified in a chapter 13 bankruptcy to reduce high interest rates to the current court-set rate of 4.75 percent. Don’t miss our video on this subject at http://www.youtube.com/watch?v=VVAr10-LLfw
For those borrowers who simply want to keep paying for their cars under the original loan terms and can afford the payments, the Code allows them to do so in any chapter. In a chapter 7 case, however, Code changes made in 2005 allow the lender to repossess the vehicle if the borrower does not sign an agreement reaffirming the car loan. Signing a reaffirmation agreement means that the reaffirmed amount will not be discharged in the bankruptcy case. Sometimes, we are able to negotiate a reduction in principal or interest rate as a condition of signing a reaffirmation agreement. Some of our clients prefer to forego signing a reaffirmation agreement altogether and take the chance that the lender will not exercise its right to repossess the car as long as the loan payments are made on time.
With or without a reaffirmation agreement, timely car loan payments can help rebuild credit scores after bankruptcy.
For those who don’t want or can’t afford to continue making payments on their car loan, there is the option of surrendering the vehicle and discharging the loan in the bankruptcy case.
So don’t let your love affair with your car keep you from getting advice from an attorney about whether bankruptcy is right for you. With our combined twenty-six years of legal experience, we can help you escape the credit rat race and get you on the road to financial security.
Call us today at 808-585-1000 for a free no obligation consultation. Dump the debt and get a fresh start.
The Law Office of Edward D. Magauran files bankruptcies from our Honolulu office on all the Hawaiian Islands, Oahu, Big Island, Maui and Kauai. Find out what we can do for you today!