Often, when someone is considering bankruptcy, the first thing they are concerned with is their car. When the car is encumbered by a loan, there are a lot of questions regarding what happens to the loan when a bankruptcy is filed. Can you keep your car? Does the loan have to be paid? What if I’m behind on my car payments?
I want to keep my car!
A car is essential to most people’s day-to-day life, so it’s understandable that consumers typically want to keep their car. If the car is encumbered by a loan, even a title loan, that loan must be satisfied in order to retain the vehicle. This means you must pay the loan to keep the car. In a Chapter 7 filing, you are getting rid of the debt you owe, so what options do you have to keep the car loan?
A reaffirmation agreement is the process of pulling the car loan out of the bankruptcy and reinstating the loan. While the loan terms can occasionally be negotiated, the loan terms typically remain the same as they were prior to filing. In this instance, a Reaffirmation Agreement is filed with the court and you keep paying the car loan as you normally would. Reaffirmations do need to be approved by the court, so the court will typically want to see that you can afford to continue making payments.
When you redeem a loan, you pay off the vehicle in a lump sum, typically for the value of the car. This can be an opportunity to save some money on the loan balance, as the car is usually worth less than the balance owed. The problem being that few people have the availability to pay a large lump sum.
Fortunately, the court allows you to refinance the vehicle for fair market value with a different lender. If the vehicle qualifies, the loan is refinanced under new terms and the new lender then pays the prior creditor off at the time of refinance. You will then make monthly car payments on the new, refinanced loan.
Retain and Pay
Some people simply want to continue making their car payments and not go through the Reaffirmation process. This will keep the car loan in the bankruptcy and the debt will be discharged. Legally you have no obligation to pay the loan and the lender has no obligation to let you keep the car. While a car lender may allow you to continue making payments and keep the loan, this could leave you at risk for repossession, even if you are current on your payments. The creditor will likely no longer report your payment activity on your credit report since the debt was technically discharged. If you are considering simply retaining and paying the loan, it would be best to speak with a qualified bankruptcy attorney before making a decision.
I want to keep my car, but I’m behind on my car payments!
If you find yourself in a situation where you are behind on your payments, a Chapter 13 bankruptcy may be the best options available to you. In a Chapter 13 filing, you make payments to the court on a monthly basis and the court will pay your creditors on your behalf. This enables you to get caught up on your arrears over time and will save the vehicle from the risk of repossession. Even if the car has already been repossessed a Chapter 13 filing may be able to recover the car as long as the bankruptcy is filed right away.
When filing a Chapter 13 bankruptcy, you have the option of continuing to make your car payment directly to the lender or pay the vehicle through the Chapter 13 plan payment. If you choose to pay the car directly, the loan terms remain the same and you are able to keep the car as long as you remain current on any future payments that come due.
If you choose to pay the vehicle through your bankruptcy, you will make your payment to the court and the court will then pay the lender on your behalf.
Paying the car payment through the Chapter 13 bankruptcy may come with some added benefits:
New Interest Rate
One benefit of paying the loan through the Chapter 13 plan payment is the ability to set the interest rate. Your bankruptcy attorney can propose any interest rate for the loan repayment when it is paid by the court through your plan payment. If the creditor objects to the proposed rate, your attorney can then negotiate the interest rate on your behalf. If your current interest rate is high, this may equate a significant savings over the life of the loan.
Adjusted Repayment Length
If you pay the car through your bankruptcy, the loan repayment will readjust to the length of your bankruptcy. This means you can stretch out the loan repayment up to 60 months from the time of filing. While this may lengthen how long it takes for the loan to be repaid, dividing the remaining balance over a longer period results in a lower monthly payment. If your monthly budget is tight, this could save you some money on a month-to-month basis.
Paying the Loan at Market Value
Like a Redemption in Chapter 7, the bankruptcy court allows a Chapter 13 client to pay the car loan back at fair market value so long as the vehicle meets certain qualifications. In a situation where the loan balance is much higher than the car’s value, this may equate a significant savings in repayment.
I Can’t Afford to Keep The Car!
Of course, there are situations where continuing to make your car payments isn’t feasible. If you cannot afford the car payment, and a Redemption is not an option, you always have the option to surrender the car in your bankruptcy filing. In this scenario, you simply walk away from the loan and the lender picks up the vehicle. Since the loan was surrendered in the bankruptcy filing, the lender can never come after you for a deficiency balance.
If you surrender your car, there may be some lenders willing to work with you post-bankruptcy to get you a new or used car that works better with your budget. Some consumers may choose to surrender a car loan through bankruptcy so they may get financing for a different vehicle that is better suited to their budget.
When considering bankruptcy filing, there are many options available to you when it comes to your car loan. Whether you need to file a Chapter 7 or a Chapter 13, discussing your situation with a qualified bankruptcy attorney will be an important step in determining what the best course of action will be. What is best for one person may be different than what is best for you.
If you are considering filing for bankruptcy, reach out to a local bankruptcy attorney in your area. Winterbotham Parham Teeple, a PC practices throughout Southern California, including Riverside County, Los Angeles County, San Bernardino County and Orange County. If you live in the area and need a free consultation to discuss what would work best for you, feel free to visit our website or call us directly at (800) 400-9000.