Our Puyallup car repossession and bankruptcy lawyers get asked this question a lot during many of our initial consultations.
If your car is paid off and fairly modest, you have nothing to worry about in a Chapter 7 liquidation bankruptcy. Depending on your circumstances, you can protect a car worth anywhere from $2500 to $14,425 in a Chapter 7.
Your options depend on whether you choose state or federal exemptions and what other property you need to protect. We are highly skilled at maximizing the amount of property our clients can keep in a Chapter 7. Even if your car is worth so much, the trustee wants to take it to pay some of your debts, you usually have the option of offering a cash settlement at a reduced amount.
If you are still making payments on a car, you probably don’t have enough equity to make it vulnerable to a Chapter 7 trustee. You must, however, keep up on the payments. If you do not agree to pay this debt “outside of bankruptcy” by signing a “reaffirmation agreement”, a lender can repossess your car even if you are current on the payments.
You have to be very sure you can keep making the payments after bankruptcy before signing a reaffirmation agreement because, if you fall behind, you could have your car repossessed and still be stuck with some of the loan.
A Chapter 7 is a unique chance for a fresh start and if you can’t keep up with the payments after eliminating your debt in bankruptcy, you should take the opportunity to walk away from the loan and the car by “surrendering” it. You should also make sure you have not “cross collateralized” a loan with a credit card, which some credit card lenders will do if you already have a car loan with them.
You can also “redeem” a car in a Chapter 7. Redemption involves paying off the loan at the value of the car. If you are “upside down” on the loan, this could be a great deal. There are lenders who might be able to loan you the money to redeem your car. We can file the necessary motion with the bankruptcy court and deal with your current lender to work out a payment for you – or argue the matter in front of a bankruptcy judge if necessary.
In a Chapter 13, you can pay your car loan through a consolidation plan. If you purchased your car over 910 days ago, or if the loan is a title loan, then you can “cram down” the car payment in your plan. This means you only pay 100% on the loan up to the cars value, with the rest paid the same percentage as debts like credit cards and medical bills.
Even if you purchased the car more recently, the amount of interest you pay could be a lot less. In addition, the Chapter 13 plan allows you to consolidate all kinds of debt and pay as little as 0% of some of it, which allows you more breathing space to take care of your car loan. The car payments can be spread out five years if necessary too.
Either a Chapter 7 or a Chapter 13 can stop a repossession, though in a Chapter 7 a creditor can get permission to repossess your car fairly easily if you are behind on your payments. In a Chapter 13, as long as you keep the car insured and you make your plan payments, the creditor has to deal you in bankruptcy court.
In some cases, we can even get the car back after it has been repossessed. Your car lender might object to your plan to get higher payments, but we are highly skilled at dealing with them in bankruptcy court.