You may be asking, though, how you can keep your car when filing for bankruptcy.
There are two main types of bankruptcy: Chapter 7, which involves liquidating non-exempt assets (in Texas thankfully very few assets, for most people, are non-exempt), and Chapter 13, which focuses on debt repayment. What will happen to your vehicle if you file for bankruptcy is determined by the type of bankruptcy you declare and the amount of equity you have in your car.
In case you file Chapter 7
Most of your debts are discharged, meaning your legal liability to pay the creditor/ debt has been extinguished in Chapter 7 bankruptcy. In exchange, you must surrender non-exempt property which the bankruptcy trustee will sell and use the funds to pay your unsecured creditors. In Chapter 7, the ability to keep your vehicle is determined by whether or not your equity is classified as exempt and whether or not you are behind on your car payments. (Equity = Balance of Loan – Vehicle Value) An experienced attorney can help you navigate the potential pit falls of filing for bankruptcy with a vehicle that you want to keep or surrender. It is extremely unlikely to have a non-exempt vehicle in a Chapter 7 bankruptcy.
Texas Motor Vehicle Exemption
One motor vehicle may be exempted per licensed household member up to the statutory amount. You can exempt a car if a household member does not have a license and relies on someone else to operate it. In case your equity in the vehicle is considerably greater than the appropriate motor vehicle exemption level, the trustee may sell the car, give you your exempt amount, and use the remaining profits to repay your unsecured creditors. An experienced bankruptcy attorney can help you determine BEFORE a case is filed if your property will be non-exempt, wholly exempt, or partially exempt.
What happens if you’re behind payments
Without paying the arrears or getting the lender to agree to another payment plan, you will lose your car if you file for bankruptcy under Chapter 7, even if your equity is exempt.
Here are a few options:
Redeeming the Car
You can “redeem” an automobile in Chapter 7 bankruptcy by paying the lender the car’s current replacement cost. This is only possible if the vehicle is exempt or if the trustee has decided not to sell the property. However, because this entails a lump-sum payment, it is frequently out of reach for those contemplating bankruptcy.
Reaffirming the Debt
As long as you and the lender agree on a new repayment plan, you can retain the vehicle. In this arrangement, you can alter the conditions of your initial contract, but the lender must agree. The disadvantage is that if you subsequently default on the loan, you will be responsible for the deficiency balance.
In case you file Chapter 13
When you file for Chapter 13 bankruptcy, you retain your assets while repaying some or all of your debts over a three- five-year payback period. It is essential to keep your automobile/ trustee payments current during that period to keep your vehicle. If you’re behind on your payments when you file, your Chapter 13 repayment plan can help you catch up.
- A Chapter 13 bankruptcy can allow a Debtor to retain a vehicle that they are behind on the payments, and or is wholly or partially non-exempt.
- A Chapter 13 bankruptcy can reduce the interest rate on a vehicle loan to the Prime Rate on the petition date plus two percent, presuming the full vehicle is repaid through the Chapter 13 Plan. (At the time of publish of this post that rate is 5.25%)
- If you owe more money than your vehicle is worth, some loans are eligible to be Crammed Down to Value. This means that you pay only the replacement value of the vehicle at the time the Bankruptcy Petition is filed, and the remaining amounts owed on the loan are converted to unsecured debts and discharged upon completion of the Chapter 13 Plan.
A bankruptcy attorney can guide you in the right direction
In all likelihood, your car is at the top of your most prized assets list. After all, it gives you the freedom to run errands, go to work, social events, and go about your daily routine. For this reason, you should know the ramifications of Chapter 7 or Chapter 13 bankruptcy on your car before you make a decision.
If you think that Chapter 7 or Chapter 13 is the best option for you, call Acker Warren, P.C., to get started. Your initial consultation is always free.