Can I keep my car in bankruptcy?
Posted Dec 16 2009 in Wink and Wink by @winkhesaid
As a Colorado bankruptcy lawyer, I come across many people who want to know the answer to this question. The short answer is that you can almost always keep some kind of car in bankruptcy, but it may not be your current vehicle. The legalities surrounding vehicles in bankruptcy are complicated and you should go into the process with a flexible mindset.
Legal Considerations – EQUITY and LEINS
From a legal perspective, you can only keep your car in bankruptcy to the extent your equity in it is exempt under State law. In Colorado, you are allowed $5,000 in vehicle equity, or $10,000 if you are 60 years old or older. The formula to determine equity is: current value of the vehicle LESS the amount you owe on it. If your equity in the vehicle is greater than the exemption limit in your state, you may still want to file. An attorney can probably help you plan to keep the value of the equity in your vehicle while also getting the benefits bankruptcy.
Additionally, if you owe on your car, bankruptcy generally does not remove the lien on your vehicle associated with this debt. This means that you will have to make car payments in order to keep the vehicle through bankruptcy.
However, if your car is currently worth less than you owe on it, bankruptcy may reduce the value of the lien on your car to its fair market value. This can effectively reduce what you owe on the vehicle to its fair market value.
Practical Considerations – AFFORDABILITY
From a practical perspective, you should seriously consider whether you can afford your current car when entering bankruptcy. This is because bankruptcy often represents an opportunity to walk away from a bad car deal with little or no liability. I know this is tough to think about, but you should NOT let your love of a fancy ride keep you from making smart financial decisions.
Of course, you still need a car. So, if you can’t afford your current car deal, you should pursue and consider the following options when preparing to file bankruptcy. These options are:
1) HOOPTY: Buy a used vehicle with whatever money you can scrape together. Truthfully, this is probably your best financial option, but many don’t want to drive such an inexpensive car. Where I’m from, we used to call these HOOPTIES!!
2) USED VEHICLE WITH A LOAN: If you have a job, you can probably get a loan even though you are filing bankruptcy. The loan may come after you file or after your discharge, in which case you will need to make payments on your old vehicle or utilize public transportation until you have the new loan. Regardless, you can expect to pay 18% to 21% interest. This is why a less expensive car with no loan is a better deal. Still, if you have a monthly payment you can afford with a high interest rate, you’re better off than you were before.
3) NEGOTIATE YOUR CURRENT DEAL: Tell your current car lender you plan to file bankruptcy and ask them to reduce your monthly payment to something you can afford. In general, the car companies don’t like these deals, but it’s worth a try.
4) RIGHTS IN BANKRUPTCY: As I mentioned above, if you owe more on your current car than it is worth, you may be able to effectively get the balance you owe on the vehicle down to its current market value. This may make the vehicle affordable to you.
a. CHAPTER 7 REDEMPTION: In Chapter 7 bankruptcy, you can do this through your right of ‘redemption’, which enables you to buy the car from the lender for what it’s worth today rather than what you owe. Of course, you need a lump sum to do this, but there are lenders who will loan this money. Unfortunately, these lenders smell blood in the water and usually charge 21% to 24% interest. Because of this, this deal only makes sense if the car is worth substantially less than you owe.
b. CHAPTER 13 CRAM DOWN: In Chapter 13 bankruptcy, you can reduce the amount of the lien on your car to the amount of its current value without having to take out a new loan IF you have owned the vehicle for at least 2.5 years. This is known as a ‘cram down’ and it can be VERY POWERFUL.
A good bankruptcy lawyer should be able to put you in touch with lenders and help you evaluate these options. First and foremost, the best deal is one that you can afford.
So, you generally keep a car in bankruptcy, but you can’t have too much equity in it and shouldn’t pay too much for it. If you think bankruptcy may make sense for you, I suggest you find out about it with a flexible mindset toward your car. For many, bankruptcy will wipe out tens of thousands of dollars worth of debt. Don’t let your love of that depreciating mode of transportation keep you from making smart financial decisions. Instead, know that bankruptcy will let you have a car of some sort and go for the fresh start!!
January 15th, 2010 at 3:34 pm
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