Can I Keep My Vehicle After Chapter 7 Bankruptcy?
Chapter 7 is an erase-your-debts-start-fresh bankruptcy. A debtor in Chapter 7 is unable to pay his creditors over time, so he offers to liquidate his assets. The basic idea is that all of the debtor’s property is taken and sold to pay creditors. Any debt that cannot be paid from the debtor’s property is legally discharged. The debtor has paid all he can.
However, it’s not practical to take everything a person owns. Consequently the federal bankruptcy laws balance the rights of the creditors to receive payment against the need of the debtor to remain able to provide food, clothing, and shelter for his family. The bankruptcy laws allow the debtor to keep reasonable and modest amounts of furniture, clothing, jewelry, and, in most cases, a home and car.
Keeping a vehicle after filing Chapter 7 depends on three questions. First, "Is the vehicle worth more than you owe?" Vehicle equity must be protected with exemptions. The bankruptcy laws allow a Chapter 7 debtor to keep a modest amount of equity in a vehicle, and other exemptions may be available to protect larger amounts of equity. In basic terms, if you have a new Cadillac, and its paid for (meaning a large amount of equity), the car will be taken and sold to pay creditors.
Second, "Is the vehicle worth less than you owe?" In some cases the debtor’s vehicle loan is a great deal more than the vehicle is worth. In those cases the bankruptcy laws allow the debtor to pay the amount the vehicle is worth and discharge the difference. This process is called "redemption" and the fair market value of the vehicle must be paid to the creditor in one lump sum. Additional financing is often required to obtain the lump sum payment, although the money can come from any source.
Since a loan secured by a vehicle must be paid or the vehicle returned, the final question is, "Are you able to continue making payments?" If you are unable or unwilling to make the monthly payment, the vehicle may be surrendered back to the creditor, and you owe nothing. If you want to continue making payments on the auto loan, you should discuss a reaffirmation agreement with your attorney. Generally, a reaffirmation agreement is filed with the bankruptcy court and continues the loan obligations of the lender and borrower.
If you are interested in keeping your vehicle after a Chapter 7 bankruptcy case, speak to your bankruptcy attorney and discuss your options of surrender, reaffirmation, or redemption. Your attorney can explain the benefits of each process and map out a plan to keep your vehicle before you ever file your case.