Being able to keep their car is one of the main concerns people having when considering whether to file for bankruptcy relief. In South Florida, especially, most people need a car to get around and commute to and from work. The following factors are considered in determining which bankruptcy chapter to file so that your car is not at risk.
In a chapter 7 bankruptcy case (sometimes referred to as liquidation bankruptcy or straight bankruptcy), there are three options when it comes to your vehicle(s):
- Reaffirm. When you reaffirm your vehicle loan, you are agreeing to continue making payments to the car loan company, as previously agreed. Once reaffirmed (unless you timely rescind), the car loan is not wiped out in the bankruptcy case. If you subsequently default on the payments and the vehicle is repossessed, you may be personally liable for the deficiency, if there is one.
The reaffirmation is an agreement between you and the financing company. The other factor to consider is the value of the vehicle and whether it is protected in your bankruptcy. Generally, Florida bankruptcy filers are entitled to a motor vehicle exemption of $1,000 in the equity of one vehicle.
If the current value of the vehicle is less than the reaffirmed loan balance, then there is no equity in the vehicle and you may keep the vehicle. If there is equity, you can still keep the car, as follows:
If the current value of the vehicle is higher than the reaffirmed loan balance, then you can protect $1,000 worth of equity. What happens if there is much more equity than the allowed $1,000? If you are a Florida resident and do not own a homestead property, you get what is called a “wildcard” exemption totaling $4,000 in addition to the motor vehicle exemption of $1,000 and the personal property exemption of $1,000, which you might be able to apply to the equity of the vehicle. If this is not enough, or if you do have a homestead property and do not get the “wildcard” exemption, you have the option of reaching an agreement with the bankruptcy trustee to essentially buy back the non-exempt portion of the vehicle, so that you may keep it. If there is too much equity in the vehicle, then chapter 13 bankruptcy might be a better option for you, if you qualify, so that you may keep your car.
For example, if the vehicle is currently worth $20,000 and the reaffirmed loan balance is $15,000, the equity is $5,000 (current value minus loan balance). The equity of $5,000 is what is considered property of the estate. You can apply the motor vehicle exemption of $1,000. If you do not own a home, you might be able to apply the “wildcard” exemption of $4,000, that covers the entire equity and you may keep your car. Equity of $5,000 minus $1,000 motor vehicle – $4,000 wildcard = $0.00 unprotected value in bankruptcy.
If you do own a home, then you can only apply the $1,000. That leaves you with unprotected equity of $4,000. One option is to buy back this amount from the bankruptcy trustee (agree to pay this amount to keep the car). If this is not a feasible option for you, then chapter 13 bankruptcy would be a better choice so that your car is not at risk.
- Redeem. Cars depreciate almost immediately. If your vehicle is currently worth much less than the loan balance, redemption may benefit you. Redemption entails paying the car loan company the amount of the current value of the car instead of the loan balance. This payment is usually made in a lump sum; however, there are financing companies that give you a new loan so that you only have to make monthly payments. Just make sure the interest is not too high and that the monthly payments are affordable. For example, if your car is currently worth $7,000 but the loan balance is $20,000, with redemption, you can pay the car loan company $7,000 and keep the car free and clear instead of the $20,000. If you do not have access to these funds, a financing company may be able to loan you the money to pay off the current creditor.
- Surrender. Some cars are lemons or are just not worth keeping because the value is much less than the amount owed. Bankruptcy filers may choose to surrender the vehicle. The lender takes the vehicle back and any personal liability is wiped out in bankruptcy.
- In chapter 13 bankruptcy, you keep the vehicle. Chapter 13 bankruptcies require monthly payments to the trustee for 3 to 5 years. If the equity in the vehicle is not protected (as discussed above), you will not lose the vehicle, but you will need to pay the unprotected portion of the equity in the plan, spread out over 3 to 5 years. Depending on the equity amount, this monthly amount may be nominal.
If your vehicle is currently worth less than you owe on it and/or the interest rate is astronomical, chapter 13 provides another benefit. You can “cram down” the loan balance to the value of the vehicle, if the vehicle was purchased over 910 days ago. You can also cram down the interest rate to the current rate, which is around 5 to 6%. This crammed down amount is then paid in the bankruptcy plan, spread out over 3 to 5 years. Depending on the case, this may lower the monthly amount as well as the total amount being paid for the vehicle. Once you complete your bankruptcy case, you then own the vehicle free and clear.
As you can see, there are many factors to consider in determining which chapter and which option is best for you. If you need to file bankruptcy, you do not need to worry about losing your car (as long as you know which option would better protect your interests).
Note that the exemptions vary by state. The information provided in this article is based on Florida exemptions.
Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 1,800 homes from foreclosure, eliminated $100,000,000 in mortgage principal and consumer debt, and have collected millions of dollars on behalf of our clients due to bank, loan servicer, and debt collector violations, negligence and fraud. Contact us for a free consultation to see how we may be able to help you.