Keeping a Vehicle with a Debt under Chapter 7 “Straight Bankruptcy”

Posted by Kevin on May 27, 2017 under Bankruptcy Blog | Comments are off for this article

If you borrowed money to purchase your motor vehicle, you have signed a promissory note which is an obligation to pay the loan debt.  You also gave to the lender a lien of your vehicle.   In bankruptcy, your lender is known as a secured creditor.  Although the underlying debt may be discharged in bankruptcy, the lien passes through the bankruptcy because it is a property right.  That means that the lender can always foreclose on the lien if you do not make payments.

The Bankruptcy Trustee Only Cares about Equity Beyond Any Exemption

In a Chapter 7 case you have two people besides you who could be interested in your vehicle. Clearly, the lender is interested.  But also, the  bankruptcy trustee will become interested if there is equity in the vehicle that exceeds the amount of the exemption.  In New Jersey, the vast majority of debtors use the federal exemption which is $3775.   There is seldom too much equity if you owe on a vehicle, but check with your attorney to make sure this is not an issue in your case.

Dealing with the Lender-

Surrender

You may not want to keep your vehicle for a multitude of reasons.  Or you may not be in a position to make the vehicle loan current within a short time after the bankruptcy filing.  If you just surrendered your vehicle without a bankruptcy, you’ll very likely owe and be sued for the “deficiency balance” (amount of loan plus all repo and sale costs minus the sales price).  Especially in auction situations, that deficiency balance is often much higher than you expect.  Surrendering the vehicle in your Chapter 7 bankruptcy eliminates the deficiency scenario. Indeed, that is a common purpose for filing bankruptcy.

Reaffirm

If you want to keep your vehicle, generally you must be either current on your loan or able to get current within about 30 to 60 days after filing the Chapter 7 case.  In New Jersey, you are required to sign a reaffirmation agreement, which legally excludes the vehicle loan from the discharge (the legal write-off) of the rest of your debts. Then you have to stay current if you want to keep the car.  Remember, because the vehicle loan was not discharged in the bankruptcy, if you miss payments, the lender can repossess the car, sell it at auction and come after you for any deficiency.  So talk to your attorney and think carefully about the risks before reaffirming your vehicle loan.

Redeem

You can keep your vehicle if you redeem  by paying to the secured creditor the vehicle’s current replacement value (what you would pay a retail dealer for a vehicle of comparable age and condition).  I mention this in passing because in over 30 years of  filing Chapter 7’s, I have never had a client who redeemed a motor vehicle.  Why?  Given the price of motor vehicles these days, it takes thousands of dollars to redeem and most of my clients would not have filed bankruptcy if they had a spare $5-10,000 of cash laying around.  But, in theory, you could do it.

Conclusion

Usually “straight bankruptcy”—Chapter 7—works best way if your vehicle situation is pretty straightforward: you either want to surrender a vehicle, or else you want to hang onto it.  Chapter 7 gives you these options.