Can I Keep My Car?

Posted by Kevin on November 3, 2009 under Bankruptcy Blog | Be the First to Comment

For most debtors, their car is the second most important asset after their home (for males under 30, it may be #1).  Even in a densely populated State like New Jersey, you need your car to get to work, do your food shopping, and to take care of emergencies.  If you are thinking about filing bankruptcy, it is only natural to worry about whether you can keep your car.

Well, the answer is that in a Chapter 13, the debtor chooses whether she wants to keep her car.  In a Chapter 7, the debtor can usually keep her car.

Let’s focus on Chapter 7.  A debtor has an exemption of $3225 for one vehicle.  If you recently purchased your car and it is financed, you almost always get to keep it.  Why?  Because people put very little down on a car.  And cars depreciate in value quickly.  So the usual scenario is that the debtor owes more on the car than it is worth.  The Chapter 7 trustee walks away from the car (called abandonment) because if he tries to sell it, all the money goes to the secured creditor.  The unsecured creditors, whom the trustee represents, would get nothing- so why bother.

But let’s say the car loan is paid off.  Now, we have to do a little figuring.  First, you have to value the car.  I use Kelley Blue Book for car valuation.  When you find out the value of the car (which sometimes turns into a negotiation with the trustee), you then subtract the $3225.  The problem is that with most cars less than 8 years old, you come out with a positive value.  That means the car has equity.  The Chapter 7 trustee can sell the car and make a distribution to unsecured creditors.

What do you do?  Well, you can use your wild card exemption to try to bring the value down to zero.  If you do not have a house, you have over $11,000 of exemptions that may be applied to your car.  What if you do not have enough wild card to make the car exempt.  In that case, you need to negotiate a settlement with the trustee or give up the car.

Even if your car is exempt, you are not out of the woods if the car is financed.  In that case, the Code states that a debtor must either surrender, redeem or reaffirm the debt.  In simple terms, surrender means you call up GMAC and tell them you want them to pick up the car.  You owe GMAC nothing, but then again, you have no car.  Redemption means that you pay GMAC the fair market value of the car in one shot.  If the car is worth $5,000 but you owe $7500, you get the car for $5,000.  Sounds like a good deal.  In theory, it is.  But if you are bankrupt, you probably do not have that type of cash lying around.  Finally, you can re-affirm the debt.  That means that you keep the car, but promise to pay off the entire loan.  Using the example above, if you re-affirm, then you have to pay the $7500 with interest and then you own the car.  If you do not pay, however, you still owe GMAC even though you filed bankruptcy.  GMAC will repo the car, sell it at auction, and come to you for the difference between $7500 and what they got for it at auction.

What if the debtor just keeps making payments but does not reaffirm (called “retain and pay”).  Under the old law, that was perfectly all right.  Under BAPCPA (the current law) in NJ, you run the risk of having your car repo”ed.  The debtor should consult with a qualified bankruptcy lawyer on this issue.

What if the car is leased?  You have 2 choices- either assume the lease and make payments, or reject the lease and give it up.  With a lease, however, the value of the car and exemption do not really come into play unless you are renting a Porsche and the trustee objects to the $800 per month payment.  But that’s a different story.