People often worry that they might lose their cars if they file bankruptcy. Usually that does not happen, at least for our clients.
How are vehicle loans affected by filing bankruptcy?
Vehicles with loans are protected better in a Chapter 13 bankruptcy than in a Chapter 7. In a Chapter 13 case, the remaining balance of the loan can sometimes be reduced down to the current value of the vehicle. Even if the loan balance cannot be reduced, usually the interest rate can be reduced in a Chapter 13. In a Chapter 13, you would no longer make your car payments directly to the lender, and you do not have to catch up on past-due payments. Monthly payments on the remaining loan balance are recalculated and stretched over up to five years. In most cases, these monthly payments are much less than your current payments and would be more affordable for you. These new monthly payments are lumped into a new Chapter 13 plan payment that you make to the Chapter 13 Trustee. Often the new Chapter 13 plan is less than your old car payment, but that depends on what types of other debts you have and how they are being treated in the Chapter 13 plan.
In Chapter 7 cases, court cases that apply in our area (Santa Clara County, California) say that you have to “reaffirm” your car loan in order to protect it from repossession by the lender after you file a Chapter 7. This is very dangerous because if you “reaffirm” the car loan, the car lender could sue you later on if you fall behind on the car payments and the car is repossessed then. We do not recommend filing a Chapter 7 case if you have a car loan unless it is almost paid off. Other bankruptcy attorneys do not explain this problem very well (or at all) to their clients. We often hear stories about other attorneys’ clients who filed Chapter 7 cases and their cars were repossessed or they were sued and their wages were garnished later on. We are concerned about your future after the bankruptcy is filed, and we do not recommend that you put yourself in that dangerous position. Again, we recommend that you file a Chapter 13 case if you want to keep a car with a loan on it with a sizable unpaid balance.
How are vehicle leases affected by filing bankruptcy?
In a Chapter 13 case, you would normally continue to make your lease payments directly to the lender, although we do list the lender in your schedule of debts.
In a Chapter 7 case, the lender will probably demand that you “reaffirm” the car lease, similar to the car loan treatment. In addition to the problems mentioned above for a car loan, the car lease has an additional problem if it is “reaffirmed” in a Chapter 7. Frequently, at the end of a car lease, there will be a “deficiency” amount calculated by the lender and charged to you. This deficiency is based on the mileage and condition of the car when you return it at the end of the lease. If you have “reaffirmed” the lease in a Chapter 7, you will actually owe that deficiency amount at the end of the lease. That does not happen in a Chapter 13 case, under normal circumstances. That is why it is often better to file a Chapter 13 if you have a car lease.
How are vehicles owned “free and clear” without loans affected by filing bankruptcy?
People who file Chapter 7 and Chapter 13 cases in California are allowed to keep certain items with specified values according to California state law. The values of the items you can keep in bankruptcy are called “exemptions.” There are two separate lists of exemptions from which California bankruptcy debtors can choose. Which list you will choose will depend on what types of assets you own and how much they are worth, compared with the values of the exemptions included in each of the two lists. An experienced bankruptcy attorney is needed to help guide you through the process of valuing your assets and selecting the right list of exemptions to best protect your assets.
One or more vehicles is an item on these two lists. Your car can be exempted and protected in your bankruptcy case, unless it is a very new expensive car. Even then, there may be a way to protect it, depending on other factors in your case. Do not try to predict whether your car can be protected, because these calculations are so complex that a normal person — or even a normal attorney — may not know how to figure it out. We have the experience and expertise to be able to show you what your options really are.