Can I keep my car...or should I keep my car?

I am constantly asked by clients about whether they should keep their car(s) in a bankruptcy proceeding. This is a serious issue because you need the car to get to work. In determining whether a client should keep his or her car through the bankruptcy process depends on a number of variables.

The biggest concern I have with respect to keeping a car is whether the client is current on the car loan. If not, the lender could repossess the car at any time. If a client is behind in his/her payments, I usually suggest contacting the lender to see if they are willing to negotiate the terms of the loan or give the client an extension of time to bring the loan current. Unfortunately, even in this economy, most lenders will no agree to modify the terms of the loan. This is where bankruptcy can be a benefit.

If my client files a Chapter 7 bankruptcy we have a a few options available. First, the debtor can discharge the debt (give the car back and walk away from the debt...yes you will in most circumstances be able to get another car loan immediately after your bankruptcy case closes). We can also talk with the lender's legal counsel about modifying the loan (I find that while the lender may refuse to modify the loan when I contact them directly their legal counsel can work with me to get the lender on board) or attempt to work out a redemption agreement (I work with third party lenders who can often refinance the vehicle loan and in many instances save my client money by redeeming for the vehicle's fair market value).

If my client files a Chapter 13 bankruptcy, surrendering the vehicle back to the lender is still an option. However, in a 13, most people opt to roll their past due vehicle payments into their plan (payments made over 36 to 60 month period of time to pay back a portion of debt). This option will allow the debtor to keep the car without the fear of repossession. Car payments (past due and current) are usually made through the plan. This can often give us the ability to reduce the balance and interest rate on the loan in a manner similar to redemption. The difference is that in Ch. 13, we do not have to work with a third party lender as a new loan is not required.

Another consideration is the amount of the monthly payment. Since the bankruptcy laws changed in 2005, the Courts have taken a much stronger stance against large car payments. As for what constitutes a large payment, the answer varies case to case taking into consideration the household income and the need (if any) for the vehicle in question (handicapped accessible vehicle or a heavy duty truck needed for work). Obviously, even if your car loan is current, the amount of the payment is still an issue that must be dealt with through the bankruptcy.

Unfortunately, cars lose their value rather quickly. Thus, most of us have little or no equity our vehicles. This is another consideration to look at when deciding whether to keep a vehicle or surrender it. If the vehicle loan is considerably upside down and has not been owned long enough to force the reduction in principal to match the vehicle's value (typically 2.5 years), it may be advantageous to walk away from the vehicle. If you have owned the vehicle more than 2.5 years, you can (as discussed above) redeem the vehicle with a new loan or if you file a Ch. 13 by utilizing the cram down provisions of the code.





At first glance, this situation can seem confusing. However, I can work with you to help you figure out which option best suits your needs.