Your Vehicle Loan Options in a Chapter 7 “Straight Bankruptcy” Case

Posted by Kevin on November 12, 2019 under Bankruptcy Blog | Comments are off for this article

Whether you want to keep your vehicle or get rid of it, and whether you are current or behind on your payments, Chapter 7 bankruptcy can address the issue.

The “Automatic Stay” Gives You the Chance to Decide to Keep or Surrender

As long as you file your Chapter 7 case before your vehicle gets repossessed, your lender can’t repossess it once you do file. The same “automatic stay” law that stops all your creditors from calling you, suing you, and garnishing your wages also stop your vehicle lender from repossessing your vehicle—at least for a month or so while you decide whether to keep your car or not.

Surrendering Your Vehicle

If you decide to surrender your vehicle, Chapter 7 bankruptcy is often the best way to do so. The reason is because with most vehicle loans even after surrendering the vehicle, you would still owe money to your lender after the surrender. This “deficiency balance” is the amount you owe after the lender repossesses the vehicle, sells it—usually at auction, pays itself its costs of repossession and sale out of the proceeds of sale, and then pays the rest of the proceeds towards your loan’s interest, late fees, and principal balance.  Based on how vehicles depreciate and how much is owed on the loan, this scenario almost always creates a deficiency.

Surrendering your vehicle during your Chapter 7 case allows you to legally and permanently write off (“discharge”) that entire remaining debt, including any potential deficiency.

Keep Your Vehicle

If you want to keep your car or truck, whether you are current on your loan, and if not how quickly you can catch up, are crucial.

If You Are Current

If you want to keep your vehicle and are current at the time your Chapter 7 case is filed, and can keep making the payments on time, it’s simple.  The Code provides that you can reaffirm the debt.  You sign a “reaffirmation agreement” stating that you intend to keep your vehicle and give your consent that the obligation to the vehicle lender will not be discharged.  The Court must approve the reaffirmation agreement after a hearing.   The downside is that if you default going forward, the lender will repossess, sell the vehicle and come after you for any deficiency because the underlying debt was never discharged.

The Court must approve the reaffirmation agreement after a hearing.  The Court can withhold approval of a reaffirmation agreement if it is not in the best interests of the debtor.

Prior to the 2005 revisions to the Bankruptcy Code, a debtor could retain and pay without reaffirming the debt.  Although not specifically written into the Code, it was allowed by the courts and pretty much accepted practice.   In that case, any potential deficiency was discharged and you just continued paying.  So, if you defaulted in the future, the lender could repossess but not come after you for a deficiency.

That very pro debtor situation was pretty much written out of the 2005 amendments to the Code.  Now, that option is usually available only if the lender consents.  Or, if the Court refuses to approve the reaffirmation agreement because it is not in the best interests of the debtor.   Although the Code does not specifically state what happens in such a situation, NJ bankruptcy judges do not allow a repossession if payments are kept current.  Moreover, if you default down the road, the underlying debt is discharged so all the lender can do is repossess the collateral.

If You Are Not Current

If you want to keep your vehicle and aren’t current on the vehicle loan at the time your Chapter 7 case is filed, your options are more limited. You would usually need to get current very quickly to be able to keep the vehicle—usually within a month or two.  Moreover, you would need to reaffirm the debt going forward.

Much greater Flexibility through Chapter 13

But that is for a later blog.