If you file for bankruptcy, will you lose your car?

Chapter 7 filers

If you file for bankruptcy, will you lose your car? This is a question frequently asked by prospective Chapter 7 filers. The answer, in a word, is no. Assets included as part of the bankruptcy estate are protected by exemptions. There is s special one for motor vehicles, and if more is needed there is a wildcard exemption available. Usually motor vehicles with any significant value are burdened with auto loans secured by the value of the vehicle. These loans, as with other secured debts, reduce the available equity, which is the value that exceeds the secured debt and needs to be exempted. Does the loan not get discharged you may ask? The borrower’s personal liability to pay it back will be, but the underlying loan remains secured by the vehicle and has to be repaid or the vehicle may be repossessed upon default.

How then is a vehicle encumbered by a secured loan protected from being repossessed after filing a Chapter 7 bankruptcy? The Bankruptcy Code requires that all debtors with secured debts file a statement of intention: whether they intend to retain or surrender the collateral which secures the loan. If they choose to retain, they must then choose whether to redeem—that is fully pay that part of the loan secured by the collateral in a lump sum—or reaffirm, which is a process by which the debtor and creditor enter into a new loan agreement approved by the court. Because this new agreement is created after the bankruptcy has been filed, no part of this reaffirmed debt will be discharged. If you can afford the reaffirmation or if the amount being reaffirmed is consistent with the value of the vehicle, there is minimal harm expected by allowing this new debt to avoid being discharged. But what if the debt amount is double the value of the car, or if the monthly payment amount is so much that you might default even though you have every intention to keep current until the balance has been fully paid? If the loan is current, can you not just choose to retain, but not reaffirm, and continue paying? In 2004, our Third Circuit Court of Appeals (Pennsylvania, New Jersey, Delaware and Virgin Islands) ruled that a “ride through” was an available option: debtors were not limited in their choices to redeeming the collateral or reaffirming the whole secured debt. In re: Price, 370 F. 3d 362 (3d. Cir. 2004). They could also choose to remain current on with their loan payments and fully pay their liability according to the original contract terms while, at the same time, having their personal liability discharged so if they later defaulted they would owe nothing more to the secured creditor. Only one year later, however, the 2005 Bankruptcy Code amendments tightened the screws and seemed to eliminate any possibility of “ride through” being a continuing option. Because the Price decision held that Code Section 521 was procedural, and did not alter a debtor’s contract rights, there has now emerged a new procedure for obtaining “ride through” in this circuit: a debtor will select Retain and Reaffirm, as she must to comply with mandated procedure, and will complete and sign a reaffirmation agreement if or when presented by the secured creditor, but the attorney will not sign the agreement if to do so would not be in the best interests of the client. That will satisfy the required process, after which a hearing may be scheduled at which the court can rule that the debtor is permitted to continue payments to the lender and the lender is permitted to send the debtor monthly statements (but not to demand payment) without violating the automatic stay. See, In re: Miller, 443 B.R. 54 (Bankr. D. Del. 2011); In re: Baker, 400 B.R. 136 (Bankr. D. Del. 2009). If the debtor later defaults and has the vehicle repossessed, her personal liability will have been discharged and she will have no obligation to pay any remainder of the balance due.

Contact Bruce H. Williams, Esquire

We have more than 40 years of experience helping people in New Jersey with bankruptcy matters.  Contact us by e-mail or call us 856-795-0800 to schedule a consultation. There is no cost or obligation for your first visit.

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