For many of us, automobiles are critical to going about our daily lives. The family car may be necessary to get to and from work, to take children to school, to get to necessary medical appointments, and for many other reasons. The importance of personal automobiles varies depending on geography, and those of us in Los Angeles are particularly dependent on our cars. Nearly 88% of Los Angeles households own at least one vehicle, and the average per household in the county is two. So, it’s no surprise that many people considering bankruptcy have a lot of questions about cars and bankruptcy; specifically how bankruptcy will affect them, or their ability to purchase vehicles moving forward.
Some of the most common questions include:
- Can bankruptcy stop my car from being repossessed?
- Will I lose my car if I file for bankruptcy?
- Will I be able to buy a car after bankruptcy?
- What if I need to buy a new car during a Chapter 13 plan?
Of course, the answers to these questions vary somewhat depending on factors such as the type of bankruptcy in question and the value of the car.
- The Impact of Bankruptcy on Vehicle Repossession
- Treatment of Cars in Chapter 7 Bankruptcy
- Treatment of Cars in Chapter 13 Bankruptcy
- Buying a Car after Bankruptcy
- Every Vehicle Owner’s Situation is Different
The Impact of Bankruptcy on Vehicle Repossession
Impending repossession of a much-needed car is a powerful motivator for someone who has been struggling with debt to move forward with a bankruptcy case. In most bankruptcy cases, an automatic stay is entered immediately upon filing. The automatic stay is a court order that stops creditors and debt collectors from pursuing collection action–including repossession.
However, the automatic stay is a temporary solution. In a Chapter 13 case, the delinquent balance on a car loan can typically be managed through the plan, allowing the debtor to keep the vehicle. But, Chapter 7 bankruptcy doesn’t eliminate secured debt, so you’ll have to make a choice.
Treatment of Cars in Chapter 7 Bankruptcy
There are two key issues regarding cars in Chapter 7 bankruptcy. Depending on the value of the automobile and the amount of any outstanding loan, one or both of these issues may arise.
The California Motor Vehicle Exemption
Chapter 7 bankruptcy is also called “liquidation” bankruptcy, because in theory the debtor’s assets will be liquidated to make partial payment to creditors. However, much of the property the average person has is exempt, meaning that it is protected from creditors and the debtor gets to keep it in bankruptcy.
In California, debtors are permitted to choose between two sets of exemptions, depending on which better protects the assets they have and want to keep. Depending on which set of exemptions a Los Angeles debtor choose, either $3,050 or $5,350 in value in motor vehicles will be protected. “Value” here may mean the fair market value of an automobile that you own free of loans, or the equity in a vehicle that serves as security for a loan. If your equity in your vehicle (or the combined equity in two or more vehicles) exceeds the exemption amount, the trustee can opt to sell the vehicle and pay the proceeds in excess of the exemption to creditors.
However, you may be able to keep your car if your equity exceeds the exemption. First, if the difference between the exemption and the value of the car is very small, the trustee may determine that it is not worthwhile to invest time and money in selling the vehicle. Otherwise, if keeping your car is a priority, you may choose to pay the trustee the difference between the equity in the vehicle and your exemption. In this way, the trustee can pay the excess to creditors without you giving up your automobile.
Managing Car Loans in Chapter 7
For debtors who are carrying automobile loans, there is a second hurdle in Chapter 7 bankruptcy. While Chapter 7 wipes out a lot of unsecured debt, it doesn’t eliminate liens. Thus, a Chapter 7 debtor whose car serves as security for a loan typically has three choices:
- To surrender the car to the lender, in which case the debt becomes unsecured and can be eliminated through the Chapter 7 discharge
- To reaffirm the automobile loan, which is like entering into a new contract assuring the lienholder that the debtor will continue to make loan payments
- To redeem the vehicle, which means to purchase it from the lender for its present value–in this scenario, any excess debt can be discharged
Treatment of Cars in Chapter 13 Bankruptcy
At first glance, the treatment of cars and car loans in Chapter 13 bankruptcy seems simpler than in Chapter 7. In a Chapter 13 case, there’s no liquidation, so no exemption levels to worry about. And, any past-due payments can be included in the Chapter 13 plan.
But, that doesn’t necessarily mean that keeping the car is the right way to go. Under some circumstances, it may be beneficial to surrender a vehicle with a large loan balance or high monthly payments and get a less expensive vehicle. There are many factors to consider in deciding whether or not to carry a large car loan through bankruptcy, so it’s best to go into consultation with your bankruptcy attorney with an open mind and gather information about how each path would play out in your particular circumstances.
If your car is worth less than you owe on it and you took possession of it at least 910 days before your bankruptcy filing, you may be able to reduce the balance on your loan through a process known as “cramdown.” A cramdown reduces the amount due to replacement value of the car. You may also be able to lower your interest rate.
Thus, the cost of keeping your car in Chapter 13 bankruptcy depends on a number of factors other than the outstanding debt on the car–how long ago you purchased it, how much the car is worth now, and even the prime lending rate.
Buying a Car During Chapter 13 Bankruptcy
During a three to five year repayment plan, it may become necessary to replace your vehicle. It is possible for many debtors to finance a vehicle while in Chapter 13 bankruptcy, but the process involves a few more steps than it would outside of bankruptcy.
First and most important, a debtor in Chapter 13 bankruptcy must obtain leave from the court before taking on new debt. That means demonstrating that you can make the car payments while keeping up plan payments and covering your expenses. Most automobile financiers that work with people in Chapter 13 bankruptcy will require a court order before extending credit.
Buying a Car after Bankruptcy
Given the widespread mythology about bankruptcy destroying your credit forever, it’s no surprise that many people considering bankruptcy are concerned about their ability to purchase a car after bankruptcy. While a borrower with a recent bankruptcy may face some limitations and will likely pay a higher interest rate than an applicant with good credit, many lenders will work with post-bankruptcy borrowers. As with any credit decision, lenders will consider a wide range of factors, including your credit score, present income, and more.
Every Vehicle Owner’s Situation is Different
Whether an automobile will be “safe” in bankruptcy, whether that automobile is worth saving, and whether it is possible to reduce the amount owed on the car depend on a variety of factors. Deciding on the best course of action can be complicated, and is best considered with the assistance of an experienced Los Angeles bankruptcy attorney. You can schedule a free consultation right now to learn more about protecting or replacing your vehicle.
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.