Bankruptcy can strip you of many of your possessions. However, California law usually allows for people to retain assets they need to continue earning money and paying their basic costs of living. In many cases that can include the use of a car. So, can you file for bankruptcy and keep your car?
Can You File Bankruptcy and Keep Your Car?
There are steps you can take to make sure you can keep your car and still attain debt relief. Let’s discuss how to hold on to a car you’ve paid off and how to hold on to one that you’re still paying for.
Holding on to a Car You’ve Paid Off
If your car is yours and you owe nothing on it, the current value of your vehicle is the most important factor in determining its ultimate destination. You’ll be hoping to protect that vehicle under a bankruptcy exemption to keep it from creditors.
How Much Is Your Car Worth?
The bankruptcy court is concerned with what your vehicle would sell for right now. That value would be your equity in the car minus any payments you still owe.
Protecting Your Car with a Bankruptcy Exemption
Once the value of your car is determined you can then figure out how much you can protect with your bankruptcy exemption. Bankruptcy exemptions are used to make sure individuals filing for bankruptcy get to keep essential possessions for basic needs.
There are federal exemptions and generally a different list of exemptions granted by each state. California allows filers to protect $3,525 in automobile equity from creditors. It may only be used for one vehicle.
Many people filing bankruptcy get to keep their car because often when they’ve made payments on a vehicle over a long period of time, the outstanding debt on that vehicle is relatively small.
What if My Car is Worth More than the Exemption Amount?
If your vehicle is valued at more than $3,525 you can dip into your wild card exemption to cover the rest of the cost. The wildcard exemption provides you with over $23,000 to use on personal items that you feel you need. You may put part of this money towards shielding your car from the bankruptcy process.
Tools of the Trade Exemption
Things used for your business, like tools, uniforms, and equipment can be protected under a “tools of the trade” exemption. This can include one commercial vehicle. California allows debtors to protect up to $8,725 in business resources per person.
Holding on to a Car You’re Still Paying For
Trying to keep a car in your garage can be trickier if you still owe money on it. The money owed can make your vehicle more vulnerable to creditors, especially your car lender.
You may not own the car free and clear, but you may have been paying on it for many years and have some equity built up. That value would be the current worth of the car minus the remaining money you owe on it. This value can be enough to keep the car in your hands during the bankruptcy process.
About Your Car Loan
A car loan is a secure loan and that means if you don’t meet your payments the bank can reclaim your car and sell it to collect the remaining debt. So it’s important to keep making payments on the car so that’s it’s not immediately taken from you with you having some say in the matter.
Surrendering the Car to the Lender
If your struggle to make car payments was already a factor in your slide into bankruptcy, keeping that car and the loan attached to it may not be the best option for you. You can return the car to the lender as part of your bankruptcy claim and, after a discharge, be free from the responsibility of paying it off no matter how much you owed on it.
Redeeming the Car
One way to retain your vehicle is to redeem the car. This option lets you pay for the car’s current value in a lump-sum payment. It can be a helpful choice if you have the money to make a big single payment.
If you don’t, some lenders have started offering redemption loans that supply the money to complete a redemption deal and keep your vehicle. You should be aware that the interest on these loans can be very high.
Reaffirmation Agreement for Your Car
If paying a lump sum for your car is out of the question, you may also try to strike a reaffirmation agreement with your loan provider. A reaffirmation agreement results in a new contract with your lender that keeps you making payments following the terms of your original car loan.
One of the drawbacks to this deal is that if you fail to make payments and have to give up the vehicle, you’ll still be responsible for paying the balance of your loan. This debt is not forgiven in your bankruptcy discharge and it may provide a drain on your finances well after a bankruptcy has been settled.
For more information on bankruptcy discharge and other parts of the bankruptcy process visit our Ultimate Guide to California Bankruptcy page.
Repossession and Reaffirmation Loans
If you were behind on your car payments or it was slated to be repossessed, you may not want to reopen the debt through reaffirmation. During the bankruptcy process, an automatic stay is your protection from those creditors contacting you and filing lawsuits to get what you owe back. You could also render your car debt exempt from the discharge when your bankruptcy is approved, meaning the loan wouldn’t be wiped away.
What Happens to Your Car Under Chapter 7 Bankruptcy?
Under Chapter 7 Bankruptcy your equity in your vehicle will once again determine your options for keeping your car. If your equity can be covered by the bankruptcy exemptions, you’re allowed then you’ll be able to protect your car through the bankruptcy filing.
Surrendering the Car to the Lender
If you still owe a lot on your vehicle at high interest rates or if it was slated to be repossessed, you could let your car go back to the lender.
Car payments may have contributed to your need for bankruptcy in the first place. In Chapter 7 bankruptcy qualifying debt gets erased and your car payments can be included in your written discharge of debts if you surrender it.
Reaffirming the Car Loan in Chapter 7 Bankruptcy
If you desire to continue making payments on your car until it’s paid off, you can reaffirm the loan. This reaffirmation agreement creates a new contract with your creditor that follows the terms of the original loan.
This can help you retain your car, but the new loan will not qualify for erasure when your bankruptcy moves to the discharge phase. You’ll be on the hook for those payments even if you reach a point that you can’t afford them. You won’t be able to seek relief from the debt until you are eligible for a new Chapter 7 bankruptcy filing in eight years.
Redeeming the Car for Its Value
If you’ve managed to keep your vehicle exempt and protect it from bankruptcy, you can redeem it with your lender. Under this agreement, you would make a big, one-time payment to the loan provider for the car’s current value.
This option isn’t always feasible because most individuals seeking bankruptcy don’t have large sums of money available.
What Happens to Your Car Under Chapter 13 Bankruptcy?
If you almost have your car paid off or you are behind on payments, you should consider a Chapter 13 bankruptcy filing.
In Chapter 13 bankruptcy you hang on to your property but agree to embark on a payment plan over three to five years to reimburse some debts in full and partially pay off others. If these payments are kept up, then at the end of the term some of your debt is forgiven.
Under Chapter 13 provisions, a car payment can be added to this reimbursement schedule. This can result in a lower car payment for you each month.
Continuing to Make Car Payments
If you’ve made your car payments faithfully and haven’t gotten behind, you may want to just continue your current loan arrangement separate from your Chapter 13 payments. Once you’ve paid it off, the car is yours.
Surrendering Your Car in Chapter 13 Bankruptcy
If you and your attorney determine that a car payment just isn’t worth it, you can turn the vehicle over to the lender. You can still be responsible for some of the outstanding debt and it can be part of your Chapter 13 payments, but some of the debt can be discharged at the end of the Chapter 13 process.
Paying Your Nonexempt Equity in Your Payment Plan
Chapter 13 Bankruptcy also provides better options if you can’t protect your vehicle with your allotted bankruptcy exemptions. You may have to cover more important assets with your exemptions. If that’s the case, you can add the nonexempt portion of your vehicle equity into your repayment plan.
Reducing a Car Loan with a Chapter 13 Bankruptcy
If you owe more on your car than it’s worth, there may another option to try. If you’ve had the car loan for 30 months or more when you file your petition for a Chapter 13 bankruptcy, you might be able to negotiate a payment plan with a lower interest rate. Commonly referred to as a “cramdown,” the individual is required to pay off the value of the car instead of the loan amount at around a 5% interest rate.
Contact a Los Angeles Bankruptcy Attorney
If you are looking for a bankruptcy attorney in Los Angeles or anywhere across Southern California, please contact us today. The attorneys with the Law Offices of Steers & Associates stand by their bankruptcy clients throughout the process.
They fight to make sure clients are allowed to keep everything they can, especially basic necessities like a place to live and transportation for their families. Clients may have wondered, “can you file bankruptcy and still keep your car?” We know California bankruptcy law inside and out and can figure out the easiest way for you to hang on to your vehicle and other important possessions.
Elena Steers is a recognized expert in bankruptcy law and debt negotiation in California and has helped people from all walks of life navigate the confusing bankruptcy process. She makes sure her clients are prepared for each step of the bankruptcy journey and guides them all the way through to debt discharge and a return to normal life. Take a moment and read her extensive bankruptcy experience.
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.