New Jersey Bankruptcy Blog

Protecting a car through bankruptcy is an option that many people want to have.
A car loan, like a mortgage, is also a secured debt. However, car loans are treated much differently than mortgages by the Bankruptcy Code. There are a number of reasons for this, not the least of which is that a car depreciates in value from the moment it is driven off a lot, whereas homes tend to appreciate in value. Additionally, real estate, on which a mortgage is placed, is “unique” and has always been treated differently than personal property under the law. This does not mean that a person who files bankruptcy will lose or have to surrender his or her car. In fact, in the vast majority of cases, debtors are able to retain a car during bankruptcy.
In a Chapter 7 filing, debtors must file a “Notice of Intention” with regard to their secured debts. This form lets the secured creditor know what the debtor intends to do with the property on which there is a secured debt. For example, a debtor could decide to surrender the property and no longer pay the creditor anything. If, instead, the debtor decides to keep a car on which there is a lien, he must “reaffirm” the debt. In the simplest terms, a reaffirmation agreement operates as a new post-petition contract with the lender. Because the reaffirmation agreement is post-petition, rather than pre-petition, the debt represented by the reaffirmation agreement is not discharged. If the debtor later defaults on his payments, the creditor can not only repossess the vehicle, but can also proceed to sue the debtor personally.
Reaffirmation agreements can be a real benefit to the Chapter 7 debtor. If enough time passed from when the car was purchased to when the bankruptcy petition is filed, the debtor can reaffirm for the fair market value of the vehicle, rather than the amount owed, if the amount owed is higher. For example, if the car has a value of $5,000.00, but the debtor still owes $10,000.00 pursuant to his pre-petition financing, he can reaffirm for $5,000.00 only, lowering his monthly payments substantially. As this is a remedy unavailable outside of bankruptcy, it is very important to let your lawyer know when you purchased any vehicle on which you have a car payment, so that he may negotiate the best terms for you.
Reaffirmation agreements also help Chapter 7 debtors reestablish credit after the completion of their bankruptcy. Unlike other discharged debt, a reaffirmed debt on a car will be listed on one’s credit report as “paid as agreed”, so each payment can help a discharged debtor prove his or her worthiness to be extended credit in the future.
Chapter 13 debtors are also able to protect their cars through the Plan they file with the court. If a debtor is in arrears – behind on their payments – they can pay the arrears through the plan, and make their current payments outside of the plan, directly to the lender. For example, if a debtor’s monthly payment is $500.00 per month and he is 3 months late, the $1500.00 he owes to the lender can be “cured” through the plan – basically, spread out over 36 to 60 months, while he proceeds to pay the regular $500.00 payment directly to the lender. The Chapter 13 debtor can also reduce the total principal that is due the lender, in the same way that a Chapter 7 debtor can, by “cramming down” the amount which needs to be paid to the fair market value of the vehicle if it is less than the amount owed, and enough time has passed since the vehicle was purchased.
With all of the above, it is important to note that the Bankruptcy Code allows only a certain amount of equity value in a vehicle to be “exempted” by debtors. The necessity of owning a vehicle in order to commute to work and live one’s daily life is understood and addressed by the Code and the court. The desire to own a luxury vehicle, however, is not. A debtor with a Rolls Royce will have a hard time justifying retaining that vehicle when it could either be sold by the trustee to obtain significant funds for the unsecured creditors or when the payments previously made on that vehicle could instead be made to the unsecured creditors through a Chapter 13 plan.
Because the timing of the filing of the petition is crucial to a determination of whether a loan can be “crammed down” and because, in Chapter 7, a Notice of Intention must be timely filed, it is important that debtors communicate clearly with their attorney about their wishes regarding their cars. Additionally, it is important that any Reaffirmation agreement be reviewed, and negotiated if appropriate, by a competent attorney to make sure that the debtor is not only able to retain his vehicle, but can do so under the best possible terms allowed by the Bankruptcy Code.
Robert Manchel, NJ bankruptcy practitioner, will explain your bankruptcy options regarding your auto. Give him a call at (866) 503-5655 to discuss your personal situation.