Monday, September 19, 2011

Jacksonville Bankruptcy Attorney Grange – Your Car In A Chapter 7


Ever wondered what you can do with your vehicle in a Chapter 7 bankruptcy? Is is better to pay off your vehicle loan prior to filing bankruptcy? The following blog address general issues surrounding the treatment of vehicles, and most other secured personal property, in a Chapter 7 Bankruptcy.

First, lets look a financing. The general perception of the public is it is better to pay your debts than to owe creditors. Logically, that, of course, makes sense from a public policy and ethics standpoint. Nobody likes owing money, and generally, everyone feels obligated to pay their debts. In a perfect world, and even not so perfect, that is just human nature. However, the bankruptcy code was drafted and redrafted by congress, and many changes have been made.

Under the current bankruptcy code, if your gross income 6 months prior to filing bankruptcy is above the median income for a household of your size, within your state, then you have to go through a “means test” to see if you can file a Chapter 7 Bankruptcy.  Secured items are used to help you successfully get through the means test. That is, the more secured items you owe money on, that you wish to keep, the better. I know this doesn't make sense, but that's the way it generally works. And for cars, if you owe money on a couple of vehicles, this can actually give you additional deductions that will help you in completing the means test with the result you are looking for. If you don't pass the means test, you may be looking at having to do a Chapter 13, or even a Chapter 11 bankruptcy if you have significant debt.

So, should you pay off your car prior to filing a Chapter 7 bankruptcy? Generally the answer is no. But you should be current on the payments when you file with the court.

Upon filing a Chapter 7 Bankruptcy, you are presented with 3 official options, and one unofficial or rogue option. The options are to surrender, reaffirm, redeem, or ride through, with only the first three being addressed by the bankruptcy code. The last is just commonplace in some areas, among certain creditors.

First, lets look at surrender. It is exactly what it sounds like. If you decide, for whatever reason, you do not want the vehicle, you can simply surrender it to the creditor, either before the bankruptcy or during the bankruptcy, and you will not owe a deficiency balance on the loan. Some of the reasons I have seen that people surrender their vehicle are as follows:
  • The vehicle simply is not worth what is owed;
  • The payments are too high;
  • Too many repairs need to be done to the vehicle, and can't afford the repairs; and
  • To save money on insurance, registration fees, maintenance, and reduce liability.

I am sure there are many other reasons, but you get the idea.

The second option is reaffirmation. With reaffirmation, you enter into a new agreement, usually with either the same or better terms than that of the old agreement you had prior to filing bankruptcy. In most cases, you simply keep paying for the vehicle as if you had not filed bankruptcy. But, be aware, that if you get behind on payments, or in some other way breach the new agreement, the creditor may try to repossess the vehicle, sell it, and you will then owe a deficiency balance which the creditor can try to get from you by trying to take property or garnish wages, just as though you had never filed bankruptcy.

The third option is redemption. Through redemption, you pay the creditor, in one lump sum payment, the value of the vehicle as determined by agreement of the parties. This is usually done by motion to the Court. If the parties can't agree, then there is usually a hearing before the bankruptcy judge so he or she can establish a value. After this is paid, you simply don't owe any more money for the vehicle. It is yours.

The forth option, ride through, which is indicated as being unofficial, or rogue, is not addressed by the bankruptcy code.  In fact, as the bankruptcy code is printed, if you don't pick one of the three options above, the creditor is suppose to simply retrieve their collateral. But sometimes a creditor simply doesn't want the car, and does want his money. So the debtor simply keeps paying the creditor as if they had never filed. This is usually arranged between the debtor and creditor prior to filing bankruptcy, and sometimes is entered into without the intention of every entering into it. This happens if the reaffirmation agreement doesn't get filed prior to the entry of a discharge, for whatever reason, and you have a creditor and debtor that can work together. The upside of this is, if the creditor gets the vehicle because of being behind on payments, they can only get for the vehicle what they are able to get from it sale. There is no deficiency balance because it was discharged in bankruptcy. The downside is, if the creditor would rather have your vehicle than their money, they can refuse payments and get the vehicle. Now you know why I refer to this as a rogue option.

If you have any questions regarding options you have concerning vehicles, or any other personal property, you should contact a local bankruptcy attorney in you area for advice.

1 comment:

  1. Hi there! great stuff here, I'm glad that I drop by your page and found this very interesting. Thanks for sharing, keep it up!
    The reality is that many honest, hardworking people find themselves struggling to get out from under crushing debt and need to seek a bankruptcy lawyer.

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