The most valueable asset most people have, after their home, is usually their car. In today’s world it’s hard to get by without a vehicle, and people who file bankruptcy are right to be concerned about whether they can keep their car. What if you owe money on your car; can you keep making the payments? What if your car is paid off; can you lose your car in bankruptcy?
Chapter 7 is the form of bankruptcy in which you discharge all your debts in a quick process. There is no repayment plan, and the case is usually over in a few months. In every Chapter 7 there is a trustee, a private individual whose job it is to see if you have any property that can be turned into cash to pay creditors. The trustee is entitled to look at all your assets, including your home and your car, to see if there is any value. In the case of a car, the trustee computes the value, minus what you owe; this is the equity in the vehicle. State law protects a certain value in different types of assets, called an exemption, and in Illinois the exemption for a car is $2,400—applied to only one vehicle (a married couple filing together can double the exemption to $4,800 for one car, if both are on the title). If, after doing this math, there is more than a few thousand dollars in value left, the trustee may be able to sell your car. Before filing Chapter 7, consult with an experienced bankruptcy lawyer to make sure that you won’t be at risk of losing your car.
What about paying for the car in Chapter 7? If you can afford the payments, you keep paying the car lender and you keep the car. The lender might send an agreement called a reaffirmation that provides that you will keep making the payments, and remain liable for the whole loan amount, despite the fact that you filed bankruptcy. Talk to your lawyer about the effect of a reaffirmation agreement.
If the car is worth less than you owe, you might be able to redeem the vehicle by paying the current value. For example, if the car is worth $10,000 but you owe $20,000, you can make a one-time $10,000 payment to get the car free and clear—the rest of the debt gets discharged. You have to come up with the $10,000 in one lump sum payment; from an IRA or 401(k), from family, or from a new lender. There is actually a strong market for lenders who will lend you the value of your car, knowing that you are redeeming the car in a Chapter 7. These are often called “722 lenders,” because redemption proceeds under Section 722 of the Bankruptcy Code. You can search for lenders on line, or your bankruptcy lawyer can help you find one.
If you just don’t want to keep the car, or can’t afford the payments and can’t raise the money to redeem, you can always surrender the car. Outside of bankruptcy, you might owe the difference if the car is worth less than you owe; but in Chapter 7, the entire balance of the debt should be discharged in bankruptcy.
Keeping and paying for a vehicle in a Chapter 13 repayment plan works differently, and we’ll discuss that topic in a future article.