A frequently asked question when a client meets with us regarding bankruptcy is — is there a way of saving my vehicle if I file personal bankruptcy? Often times, the vehicle is relatively new and the client does not want to give it up. Additionally, many clients simply need their car to get back and forth to work. Whether you file for voluntary bankruptcy under chapter 7 or enter into a repayment plan under chapter 13, you may be able to keep your car. In fact, in most Pennsylvania bankruptcy cases, clients can indeed keep their cars.
The general rule is that as long as you continue to pay on your vehicle, you likely can retain it. Let’s take a look at the treatment under the two most common US Bankruptcy Chapters for personal filings, Chapter 7 and Chapter 13. Under Chapter 13, you will enter into a repayment plan of some sort. Typically, the monthly payment in the Chapter 13 plan is less than the monthly payment of the bills you have of the debts in the bankruptcy plan, making it a cost affordable option. Your payment amount is based on your disposable income calculations and other factors.
If you have significant equity in your car or are behind in your car payments, then more than likely Chapter 13 may be the better option for you. Generally in Chapter 13, you can keep your property and pay back some or all of your debts through either a three or five year repayment plan. The length of the plan also depends on several factors.
It is essential to understand that you must keep current on your car payments. Now, what happens if I am behind on my car payments. If you file Chapter 13, then the past due payments you owe can be paid through the Chapter 13 plan and the entire amontn you are behind must be paid in full through the plan. Under certain circumstances, you may also be able to reduce the loan based on value. Generally this can occur if your car is worth less than the amount of the original loan.
Generally, under Chapter 7, most debts will be discharged. The theory behind Chapter 7, otherwise known as the liquidation chapter, is that in exchange for discharge of your debts, you are required to give up nonexempt property. That nonexempt property is then sold by the Bankruptcy Trustee and the proceeds of the sale are used to pay your unsecured creditors. Keeping a car can depend on whether the equity is exempt and whether you are behind in payments.
So what are the options to keep your car under Chapter 7? Your first option is to enter into a reaffirmation agreement with your car lender. If your own your car free and clear, this option does not apply to you. A reaffirmation agreement means that you contract with the lender to take the car loan out of the bankruptcy altogether. It won’t be subject to the bankruptcy discharge. In exchange for keeping the car, you have to continue making the payments. It also means that the lender could repossess the car and sue you for a deficiency judgment if you default on the loan. Reaffirmation agreements must be agreed to by the lender and approved by the bankruptcy court.
In a Chapter 7 you also have the option of purchasing your car outright from your lender at the retail value of the car at the time your bankruptcy is filed. This may be a good option if the value of your car is much lower than the amount of your loan. You would have to pay for the car in one lump sum payment. You must file a motion to redeem with the bankruptcy court I will not go to much more into this option, because it is rare.
Bankruptcy is complex and may not even be the best option for you. If you have questions about whether bankruptcy is your better option or simply just needs some answers, call Mooney Law today for a FREE consultation. Our consultation for bankruptcy are always free. Call Mooney Law today at 833-MOONEYLAW or 717-200-HELP. We have 16 offices spread throughout Central Pennsylvania and Maryland for your convenience.