Category Archives: Vehicles, Cars and Bankruptcy

How Can Filing Bankruptcy Help Me Pay Less on My Vehicle Loan?


If you did not get a very good deal when purchasing a new or used car and the loan is destroying your finances each month there is light at the end of the tunnel. In Chapter 7 you can redeem the vehicle for its fair market value pursuant to Section 722 of the Bankruptcy Code (I cannot recommend this though, see why below). In Chapter 13 you can “cram down” the loan to the fair market value and reduce the percentage rate if you purchased the vehicle at least 910 days prior to filing for Chapter 13 bankruptcy.

Yes, filing Chapter 13  or Chapter 7 can reduce what you owe on your vehicle loan.

Yes, filing Chapter 13 or Chapter 7 can reduce what you owe on your vehicle loan.

Law Change in 2005 for Chapter 13 Cases and “Cram Down” of Vehicle Loans

Prior to 2005 the requirement that the purchase date of the vehicle be 910 days prior to filing of the Chapter 13 bankruptcy case did not exist. Today they say a car loan is either a 910 loan or not. We will assume you did purchase your vehicle 910 days ago and you are thinking about filing for bankruptcy.

How A Chapter 13 Bankruptcy “Cram Down” Works

As time goes by usually most vehicles are worth less than what is owed on the loan. The worse the loan or higher the percentage rate the more likely the difference between what is owed and what the vehicle is worth is larger. Under these circumstances you can save more money by filing a Chapter 13 bankruptcy and reorganize the vehicle loan. I will use a Mercury Grand Marquis as an example given that ( claims this car is one of worst investments you can make. After 60 months the Mercury Grand Marquis loses 87% of its value.

You purchased a 2012 Mercury Grand Marquis for $30,285.00 with a loan with a percentage rate of 12.5% and a $1,500 cash down payment and a 60 month term. The monthly payment is $647.60. After 910 days (2.52 years) the 2012 Mercury Grand Marquis is only worth $8,782.65 according to and you still owe $19,411.80. When filing for Chapter 13 bankruptcy you will only have to pay the fair market value of $8,782.65 at approximately 4.5%. You will save approximately $9,587.40 by filing a Chapter 13 bankruptcy case. As most experienced bankruptcy attorneys know car loan companies and banks usually object the value of the vehicle you propose in the Chapter 13 Plan. This is normal. It is in their interest to always argue the value is higher and your interest to argue the vehicle value is lower. The value is also the retail value more or less also. If you use the private party value or some other value you will off the mark.

How to Value a Car When Attempting to “Cram Down” the Value

First the date of the valuation should be the date the petition is filed pursuant to Bankruptcy Code Section 506(a)(2). Section 506(a)(2) further provides the value of personal property shall be determined based on the “replacement value of such property as of the date of the filing of the petition.” In addition, if the property was obtained for personal use the Bankruptcy Code further defines “replacement value” as the “price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.” A good case about valuing a vehicle is In re Morales, 387 B.R. 36, 45 (Bankr. C.D. Cal. 2008). Most courts will start with the Kelley Blue Book or N.A.D.A. Guide retail value for a like vehicle taking into consideration evidence present regarding he condition of the vehicle. KBB and N.A.D.A are suggested values only. So the KBB or N.A.D.A. value must be adjusted for the condition of the vehicle and must reflect that the KBB or N.A.D.A. value is the asking price, not the final price. Few to no cars are ever sold at the asking price by dealers in a retail setting.

So after all that if the value of the vehicle is low enough and the amount due on the vehicle loan is high enough to save you money on the vehicle loan filing a Chapter 13 case to reduce how much you pay for the car should be successful and in your best financial interest. Your bankruptcy attorney will have fees and costs for filing the Chapter 13 case though. So that needs to be taken into account also. There will most likely be other benefits to you filing for a Chapter 13 Bankruptcy also like discharging your credit card debt or unpaid taxes.

Chapter 7 is Different: The Car is Redeemed Under Section 722

In a Chapter 7 bankruptcy case you can also reduce the amount you pay for a vehicle loan pursuant to Section 722 of the Bankruptcy Code by redeeming the vehicle for its market value. The valuation of the vehicle is similar to that in Chapter 13 case, but the law and process is very different. A motion must be filed to redeem the vehicle. The catch with redeeming a vehicle in Chapter 7 for less than was is owed (market value) is you have to pay off the old loan with a lump sum payment. So for the example above the person redeeming their vehicle in a Chapter 7 case would have to come up with $8,782.65 to redeem the 2012 Mercury Grand Marquis. Most of our Chapter 7 bankruptcy clients do not have the cash lying around to redeem their vehicles like this. So there is a solution. There are companies out there that provide new financing or a new loan to pay off the old loan and allow you to redeem the vehicle. As I said at the beginning of this article I cannot recommend obtaining new financing to redeem under 722 of the Bankruptcy Code because the new financing is usually with a high interest rate and there are a number of fees involved. There will also be attorneys’ fees and costs for fling the motion to redeem that must be taken into account when determining if redeeming the vehicle is in your best financial interest. What you choose to do is up to you though. Just be careful and do not lock yourself into another bad loan thinking you are saving money.

What Happens to My Car When Filing Bankruptcy?


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.

Ownership Cost for Vehicles in the Means Test Finally Put to Rest in the Ransom Case


In 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCPA was passed by Congress and created the Means Test.  The Means Test was created in an attempt to change a perceived problem with the bankruptcy system.  The idea behind the Means Test was to take IRS standard deductions and compare them to the income of those in need of bankruptcy protection to determine if someone has disposable income to pay some of their debts back in a Chapter 13 bankruptcy rather than having all of the debts discharged in a Chapter 7 bankruptcy.

In 2006, Mr. Ransom filed for bankruptcy protection under Chapter 13 of the bankruptcy code.  In his Means Test Mr. Ransom included an “Ownership Cost” in line 28 of the Means Test or Form 22C even though he did not actually have a car loan or lease payment.  By taking this deduction totaling $471 per month, Mr. Ransom reduced his monthly disposable income available to pay his unsecured creditors.  Taken over a 60 month Chapter 13 plan, Mr. Ransom would not have to pay back to his unsecured creditors approximately $28,000.  FIA Cards objected to the confirmation or approval of Mr. Ransom’s Chapter 13 Plan arguing that the $471 deduction can only be taken if Mr. Ransom actually has a car loan or lease payment.

While the Ninth Circuit agreed with FIA Cards and held that Mr. Ransom could not take the $471 “Ownership Cost,” the Fifth Circuit, Seventh Circuit and Eighth Circuit in similar cases did not agree.  On January 11, 2011, the United States Supreme Court upheld the Ninth Circuits judgment and agreed that the “Ownership Cost” in line 28 and line 29 of the Means Test or Form 22C may only be taken if the bankruptcy filer actually has a car loan or lease expense.  If a person owns their car free and clear then they must not take the “Ownership Cost” deduction. A bankruptcy attorney formerly could choose to take the additional ownership expense to decrease the line 59 disposable income of their client or pass the means test altogether.

The issue in this case turns on the interpretation of the word “applicable.”  What a mess one simple word could create.  The moral of the story is when Congress is considering the language of laws to pass, they must make their intent clear and analyze each word they use when drafting new legislation.  One word could make a huge difference.  In Mr. Ransom’s case, it is now a $28,000 difference.  Contact one of our bankruptcy lawyers for more information about the Means Test or In re Ransom.

What Can be Repoed or Repossessed? Repossession Explained


Repossession of a vehicle or other personal property is never something anyone plans for.  Unfortunately it does happen.  The following is a detailed explanation about what can be repossessed when payments are missed.

Repossession is possible when a creditor has a security interest to secure payment of a debt.  The most common occurrence of repossession is of vehicles.  Foreclosure of a home is also a common instance of repossession.  Not as common is when a creditor repossesses something like a refrigerator or television.  If you miss payments, the entity that issued the loan has the right to repossess the collateral securing the payment of the debt. Contact bankruptcy lawyers in your area to find out how bankruptcy can stop repossession or get your stuff back. Usually, but not always, if you are two or more payments behind, you are at risk to have the collateral repossessed.  See Chapter 7 Basics or Chapter 13 Basics at for information about how bankruptcy can stop foreclosure and repossession.

Home Foreclosure

The repossession of a home or property is commonly called foreclosure.  In California, a non-judicial foreclosure allows a mortgage company to foreclosure on a home without going to court to obtain permission. The foreclosure process in California starts with the mortgage lender filing a Notice of Default with the county recorders office.  See California Non-Judicial Foreclosure Time Line for more information.

Vehicle Repossession

If you leased or financed the purchase of a vehicle and are making payments to a bank or the dealer you purchased the vehicle from, you gave them the right to repossess the vehicle if you miss payments. A creditor may also repossess a vehicle if insurance for the vehicle is not maintained.  The repossessing party may give you notice that they intend to repossess the vehicle, but they do not have to.  The personal items found in the repossessed vehicle cannot be sold.  The party that repossesses the vehicle should provide a list of the items found in the vehicle and how you can get them back.

Once the vehicle is repossessed the repossessing party will then try and sell the vehicle to satisfy the loan on the vehicle.  The problem is that new vehicles lose their value quickly after purchase.  Usually when the vehicle is repossessed it is worth less than what the loan balance is.  If this is true, you will be responsible for the difference between what is owed on the loan and what the repossessing party sells the vehicle for. As bankruptcy attorneys in your area should know, the deficiency balance or amount you owe should be dischargeable when filing bankruptcy.  Unfortunately the difference, or deficiency, could be thousands of dollars.  This debt will now be an unsecured debt though because there is no collateral to secure payment any longer.  Like a credit card or medical debt, the deficiency is dischargeable as an unsecured debt when filing a Chapter 7 bankruptcy or Chapter 13 bankruptcy.

Rent-To-Own Purchases

When you obtain an item by making payments in a rent-to-own arrangement the item you purchased is collateral to ensure repayment.  If you miss payments on a television, refrigerator or bedroom set the collateral could be repossessed just like a vehicle.

What Cannot be Repossessed

Items that can be repossessed have to be specifically named as collateral in the purchase agreement.  Most credit cards and personal loans do not specifically name collateral to secure the extension of credit.  So, when making a credit card purchase or purchases with a personal loan, the items purchased cannot generally be repossessed.

Why Sign a Reaffirmation Agreement?


Generally, if you have secured debt when you file for bankruptcy, you have three options: 1) surrender, 2) redeem, or 3) reaffirm the debt. The 2005 bankruptcy reforms have made it difficult for bankruptcy lawyers to provide advice regarding reaffirmation agreements. Prior to the 2005 bankruptcy reforms you could just keep making your normal car payment if you were current on the payments and wanted to keep the vehicle. Now bankruptcy attorneys are asked to sign off on a reaffirmation agreement as to whether it is in the best interest of a client or not.

The first option is self explanatory; you can surrender your property to your lender and not be liable for any deficiency relating to the surrender of the property in your bankruptcy case.

The second option is to redeem your property for the fair market value of the property.  This is advantageous if your debt is significantly higher than the fair market value of the debt.  You would only have to pay what your property is worth, not what you owe to the lender.  However, the only catch is that you have to pay the lender the fair market value of the property in one lump sum payment. Most people don’t have that amount of cash readily available; however, there are companies out there that specifically help with redemption of properties after the filing of a bankruptcy petition.

The third option is to reaffirm your debt.  After the filing of your petition, if you have secured debt, such as debt for your house or vehicles, chances are, you may receive a reaffirmation agreement from your lender to reaffirm your debt.  A reaffirmation agreement is a new contract that you sign after you have filed your petition that essentially indicates that you promise to continue making payments on your property.  Although it is the current law that you must indicate your intention to either surrender or reaffirm your debt, it is normally not advisable to sign a reaffirmation agreement because you never know what the future holds.  However, sometimes the lender makes the contract more attractive by either significantly lowering the interest rate or balance due on the remaining balance.  If that occurs, it is up to you to weigh the pros and cons of signing a reaffirmation agreement.  Better terms on the reaffirmation agreement is a great incentive to sign the reaffirmation agreement, but only do so if it does not present an undue hardship for you to pay that amount every month.  One of the disadvantages of signing a reaffirmation agreement is if at any time in the future, you are unable to continue making the promised payments, the lender can repossess your property and still pursue you for any deficiencies even though you had filed for bankruptcy.  Bankruptcy does not protect you from any debts relating to post-petition contracts signed, which is what a reaffirmation agreement is.

An unspoken fourth option is to continue making payments on your property without signing a reaffirmation agreement.  You may make prompt monthly payments to your lender and continue to keep your property.  If, at any time in the future, your finances suffer and you are unable to continue making payments, you can surrender your property, and the lender would not be able to pursue you for the deficiency since the debt was discharged along with all your other debts in your bankruptcy petition.  Although the current law indicates that you need to indicate your intention to either: surrender, redeem, or reaffirm your debt, chances are, if you are making prompt payments on your property, it would not make good business sense for the lender to repossess your property.  However, there are certain companies that will repossess your property regardless of whether you are current on your debt if you did not sign a reaffirmation agreement.  Thus, there is a risk if you do not sign the reaffirmation agreement that your property may be repossessed.