How Do I Keep My Car in Bankruptcy?

 

Cars are a dominant fact of everyday life (unless, I suppose, you live in New York City). Consequently, one of the biggest client fears is losing his car in bankruptcy.

The truth is it never happens. Since automobiles can be readily valued and the equity easily calculated, any issues regarding the car will be known well before filing, and can be readily planned for.

In most cases, and especially if the vehicle was bought new with no, or a very small, down payment, it will be “upside down” – worth less than the loan on the car. The trustee will not be interested in taking it. You can keep it if you continue to pay on it, since the lien survives the bankruptcy. And under the new bankruptcy law, you will probably have to reaffirm the debt, that is, sign and take back personal liability.

If the car’s value is way less than the loan, and you can raise the money for a lump sum payoff, you can exercise your right of redemption in Chapter 7 to release the car from the lender’s lien at its current value, as determined by the court. In Chapter 13, you basically achieve the same by doing a “cram down” of the car and paying only its current value at a slightly–above–market rate interest over the life of the plan. To qualify, the car cannot be one having a loan that was used to purchase it for personal use within 910 days (2 ½ years) of the bankruptcy filing. Hence, vehicles purchased for other uses, such a work vehicles, with purchase loans more than two and a half years before the filing, or having loans that were not used to originally purchase the car, can be “crammed down” in Chapter 13.

Finally, if the car’s payments are more of a burden than benefit, the debtor can surrender the car to the lender, relieve himself of the debt.