If I file bankruptcy can I keep my car

Many people are surprised when they find out they can keep their car after filing for bankruptcy in Alabama. There is a myth about bankruptcy that you have to surrender or give up your vehicle(s) when you file. However, this is not the case!

There are two types of bankruptcy that are commonly filed by individual consumers (i.e. not businesses or farmers) -- one type of bankruptcy is a Chapter 7 or the other type is a Chapter 13. The good news is that in either a Chapter 7 or a Chapter 13 you can almost always keep your cars and/or trucks. It is normally not if you can keep your car, because you normally can, it is which methods and terms we can use under the bankruptcy laws to keep the vehicle.

If you want more information about how this works, then read on below!

What Happens to Your Car in Chapter 7 Bankruptcy?

Most people can keep their cars in a Chapter 7. Why? Because most people either owe a significant amount on their vehicle, thereby eating up all or most of the equity or when they have had their vehicle long enough to pay it off, it has depreciated enough to fall under the exemption amount. Therefore, it is no longer an asset to the bankruptcy court valuable enough to make it worthwhile for the bankruptcy trustee to pursue.

To keep your vehicle you need you need to meet the following criteria:

1. Be current on your car loan payments if you have a car loan.
2. Maintain insurance on the vehicle as required by your car loan.
3. The vehicle cannot have enough equity to put you substantially over your personal property wildcard exemption under Alabama law.
4. You must be able to show in your budget and in a reaffirmation agreement with the car lender that you can afford to make your monthly car payment once your other unsecured debt and other dischargeable debt is cleared away.

These are the first things we, as your bankruptcy attorney, will look for to be sure that you can keep your car in a Chapter 7. The good news is that all of these, other than number 2, maintaining car insurance, can be fixed through a Chapter 13 as described below.

So, if you do not owe on your car and it does not have to much equity to exempt, you can file a Chapter 7 and keep your car. You will not have to do anything extra after filing bankruptcy.

If you owe on your car, you can file a Chapter 7 as long as you are current on your payments, have insurance as required by your vehicle creditor, not have too much equity in the vehicle, and can show the Bankruptcy Court that you can afford your monthly payments per your budget.

If you meet these requirements, you will be able to sign a reaffirmation agreement with your car creditor; and thereby, reaffirm your prior loan agreement for your car. You will continue to make your payments direct to your car lender under the same terms for interest rate, payment, amount owed, etc. For this loan, once you reaffirm it, it will be like you never filed bankruptcy with regards to it.

So, based on the above, almost all people looking at filing a Chapter 7 bankruptcy in Alabama can file and keep their car or truck or other vehicle.

What Happens to Your Car in Chapter 13 Bankruptcy?

Like in a Chapter 7, you can also almost always file a Chapter 13 bankruptcy case and keep your car as well. In fact, unlike a Chapter 7, we, as your bankruptcy attorney, can use a Chapter 13 bankruptcy to actually save your vehicle from repossession if you are behind on your payments. There are a couple of instances where filing a Chapter 13 can help you keep your car where a Chapter 7 cannot.

When you file a Chapter 13 you take the amount owed on the vehicle and put it in a Chapter 13 plan and pay it and any other debt you want or need to pay through a payment plan and through the Chapter 13 bankruptcy trustee. A Chapter 13 plan can be between 36 and 60 months long. In addition, a Chapter 13 bankruptcy allows you to drop the interest rate on your vehicle loan to prime plus 2% (which is 5.25% as of today). This normally lowers your monthly outgo regarding the vehicle by reducing the interest rate and spreading the payments back out over a 60 month time period.

Another way a Chapter 13 bankruptcy can be very helpful is by taking care of any missed payments. In this way the question is not whether people can keep his/her vehicle in a Chapter 13, but how a Chapter 13 can actually make it easier for persons keep their vehicles.

When you put the amount owed in your Chapter 13 plan it is the total amount owed, including any back payments owed. This really comes in handy if you are behind on your payments and your car lender is threatening repossession. Once you file your Chapter 13 your vehicle loan will be treated as current, no matter how far behind you were prior to the bankruptcy being filed.

Chapter 13 Cramdown on Vehicle Loan

Another benefit to filing a Chapter 13 with a auto loan is the possibility of performing a cramdown. A Chapter 13 cramdown on a vehicle loan is when a consumer has the option to pay back the fair market value of their car, truck or other motorized vehicle instead of the total amount owed or principal balance of the loan.

In order to qualify for a cramdown of the vehicle loan the loan must have been made more than 910 days prior to the bankruptcy filing. In these cases, you can pay back less than what you owe on the vehicle, reduce the interest rate, and spread the amount owed out over 60 months.  The remainder of the balance owed is paid the same as you are paying your unsecured creditors, which can be 0%.

Chapter 13 and a Car with Too Much Equity

A Chapter 13 can also help in another situation where a Chapter 7 cannot. This is the situation where you have too much equity in your vehicle. This is a rare situation, but sometimes happens when you have obtained or financed your vehicle in a less common way; such as, inheritance, paying cash for an expensive vehicle, using a 401K withdrawal to pay for a vehicle, etc.

Alabama does not have a motor vehicle exemption.  Instead of a motor vehicle exemption, Alabama has a Wildcard exemption that applies to all types of personal property, including your vehicle. If the value the equity of your vehicle along with the value of the equity in your other personal property substantially exceeds your bankruptcy exemption there can be an issue. If you have too much equity in your vehicle, this can be a problem in a Chapter 7; however, in a Chapter 13 you can just pay that "extra equity" off through your Chapter 13 plan, over a 60 month period, normally with a very affordable payment amount.

Conclusion:

As you can see from the information above, there are many ways that people might be able to keep their car after filing for bankruptcy. Both a Chapter 7 and a Chapter 13 will allow you to keep your vehicle as long as you meet a few criteria. Do not be afraid to file because of this "issue".  

Call 256-739-1962 or click here to speak with or schedule an appointment for a free consultation with a Chapter 7 and Chapter 13 Bankruptcy lawyer at Collins Law Offices, PC.  We know filing a Chapter 7 or a Chapter 13 is not an easy decision.  We want you to have all the information you need to make that decision before you pay us anything.