By Ryan C. Wood
When filing for bankruptcy protection there are exemptions that protect the stuff you own. In most bankruptcy cases, whether filing a Chapter 7 or Chapter 13 bankruptcy, you will be able to keep your cars. If you have a loan on the vehicle you can keep making the payments just like you did before filing for bankruptcy and keep the car. Below details the different circumstances in a Chapter 7 or Chapter 13 filed in California that allows you to keep your car if it is paid in full, if you have a car loan and how bankruptcy can help.
Chapter 7/13 Bankruptcy and Your Car is Paid in Full
In most bankruptcy cases you will be able to keep a paid in full car. California has two sets of exemptions to choose from when filing for bankruptcy protection. California Civil Procedure 703 exemptions include an exemption of $3,525 (Increased to $5,100 as of 2013) to protect a car plus the wildcard exemption totaling $23,250 (Increased to $26,925 as of 2013). So if you have one or more cars and the combined value of the vehicles does not exceed $26,775 (increased to $32,025 as of 2013) they can be protected. Keep in mind that the wildcard exemption is also used to protect other assets such as the money in your bank accounts and other valuable assets like expensive jewelry, so the full wildcard exemption of $23,250 (Increased to $26,925 as of 2013) will most likely not be available to protect other assets like a car. California Civil Procedure 704 exemptions include a vehicle exemption totaling $2,750 (Increased to $2,900 as of 2013). California Civil Procedure 704 exemptions provide generous homestead exemptions to protect equity in houses and the exemptions to protect other assets are more limited.
Chapter 7 Bankruptcy and Cars With Loans
If you have a vehicle loan and you choose to file a Chapter 7 case, there are three options to deal with the car loan. If you want to keep the car and can afford to make the car payment each month you can continue to make your normal monthly payment and keep the car. The car loan company will most like want you to agree to continue to pay them after the bankruptcy is filed by signing a reaffirmation agreement.
If you cannot afford the car loan and want to get rid of the car then you may surrender the car or give it back to the loan company. If you surrender the car to the loan company any debt resulting from the surrender of the car is discharged in the bankruptcy case. Once the bankruptcy case is filed and you intend to surrender the car, arrangements need to be made to give the car back.
The last option is to redeem the vehicle for its fair market value. This option is complicated and must have Court approval. When redeeming a vehicle for its fair market value the original car loan company must be paid in full what the car is worth, not what is owed on the loan at the time the bankruptcy case is filed. In most cases coming up with a lump sum payment is not an option.
Chapter 13 and Cars With Loans
In 2005 Congress reformed the Bankruptcy Code and changed the laws regarding car loans and their treatment when filing a Chapter 13 Bankruptcy. When you buy a car the value of the car usually decreases faster than you are paying for the car. So after some time has passed your car is worth less than what you owe on the car. In a Chapter 13 bankruptcy you can cram down the amount you owe on the car to the fair market value if the car was purchased 910 days before the bankruptcy case was filed, which is about two and a half years. Let’s say you owe $15,000 on your car loan and the car is only worth $8,000 at the time you filed the Chapter 13 bankruptcy case and purchased the car three years ago. You will be able now pay $8,000 for the car in the Chapter 13 plan over three or six years depending upon the circumstances. You still must pay interest on the $8,000 you will now be paying in the Chapter 13 plan. This is a very powerful way to save money especially if you paid too much for the vehicle or have a car loan with a high interest rate. The car loan company can also object to the value of the car in the Chapter 13 plan. Ultimately the Bankruptcy Judge assigned to your case will decide what the value of the car is if there is a difference of opinion as to the cars value.
To find out more about how cars are treated when filing for bankruptcy and how bankruptcy can help. Contact one of our experienced bankruptcy lawyers or bankruptcy attorneys to schedule a free consultation.