As a rule, when I speak to someone about bankruptcy, we discuss “secured” and “unsecured” debts. The debts owed to the creditor are secured by an item used as collateral are “secured” and most others are “unsecured” (like medical bills or credit cards). The most common secured debts are car loans, car title loans, home mortgages, or furniture loans. Most people are concerned about keeping their vehicle and that is understandable because we all need wheels to get around. If a client is seriously behind on a car loan, then we discuss options such as surrendering the vehicle or curing the default. If a person is current on a car loan (or other secured debts) my advice is to continue to pay those secured debts and keep them current so you can keep them throughout the bankruptcy process.
If you wish to keep your car, you have several options in Chapter 7:
Continue to Make the Car Loan Payments:
If your car payment is current, and you will be filing bankruptcy, I advise clients to continue to pay the car payment and car insurance as you have in the past. A car loan can be “reaffirmed” in bankruptcy and the loan continues as before the bankruptcy was filed. Once the loan is reaffirmed, the vehicle is no longer included in the bankruptcy and the creditor may repossess it if payments fall behind. This is the option that most people take when a car payment is current and they wish to keep the vehicle.
Cure Your Default:
If you are behind on car payments, then you have the option of paying all of the past-due car payments and curing the default to avoid repossession. When a Chapter 7 bankruptcy is filed, an automatic stay is created. The automatic stay makes it unlawful for most creditors to continue any collection activities. This means that your car lender is not even allowed to call you to collect its debt. So it cannot legally repossess your car after you file for bankruptcy unless it obtains court permission first by filing a “Motion for relief from Stay”.
However, your lender will only want to repossess your car if your loan is in default and the default is not “cured” (caught up on payments). The most common reasons a lender will file a motion for relief from the stay is lack of payments or car insurance. If you can afford to catch up on your payments or otherwise cure your default, most lenders will not repossess your car. Of course, for debtors that are significantly behind on payments, it’s often hard to come up with the money necessary to cure.
I am already behind on payments. How do I get the money to cure a default?
When most people file bankruptcy, they are paying an enormous amount of their disposable income on unsecured credit cards and medical bills. If you are filing for bankruptcy and wish to keep a secured debt, like a car, I advise people to immediate cease paying credit cards, medical bills, or other unsecured bills and loans. This frees up funds to pay the secured creditor for the car that you really need to keep.
Negotiate With Your Lender:
Car lenders make most of their money through interest payments on your loan. Most lenders would rather have you keep the car and continue making payments instead of repossessing it. If you are in default, I can negotiate with your lender to work out a way for you to cure your default and keep the car. Your lender may be willing to reduce your payments, interest rate, or even principal balance because bankruptcy will discharge your obligation to pay any remaining loan balance if your car is repossessed. But keep in mind that the new loan agreement will be a reaffirmation of the debt which means you will remain personally liable on the loan despite your bankruptcy discharge.
Redeem the Car:
You also have the option to redeem (buy back) your car in Chapter 7 bankruptcy for its fair market value. However, you must file a motion with the court and make a lump sum payment in order to redeem. This may be an attractive option if your car is worth significantly less than your loan balance. When you redeem your car by paying the lender its market value, you will own it free and clear after the bankruptcy.
What if I am too far behind or just cannot afford to keep the car?
I always discuss the option of surrendering a vehicle with my clients. If the vehicle payment is high and it is going to continue to be a financial burden to keep the car, I suggest that they surrender the vehicle in the bankruptcy and purchase something more economical after the bankruptcy is filed and discharged. Most believe that they will be unable to purchase a vehicle after filing bankruptcy but in most cases, that is not the case. There are lenders out there who are willing to work with you to get into another car because you become a better credit risk after bankruptcy.
If you have any questions, or want to speak confidentially about your situation, please feel free to contact me. I am happy to sit down with you for a no-obligation free consultation to discuss your options under the bankruptcy code.