What Is Chapter 7 Bankruptcy And How Can It Help Me
Although its referred to as a liquidation, most folks dont lose any of their property in the Chapter 7 process they shed their debts and get to start over with all their stuff. This is the case because exemption laws are in place to protect your property from the bankruptcy trustee.
In Ohio, the value of your interest in your personal vehicle is exempt up to $3,775. You may also decide to apply all or part of the wild card exemption to your vehicle. Ohios wild card exemption allows debtors to protect up to $1,250 in property value.
Exemptions apply to your equity in your property, not the overall property value. Your equity in property is the value of the property minus outstanding liens. For example, if your car is worth $15,000 and you have a car loan for $10,000, your equity in the car is $5,000. In a Chapter 7 case, your car is only at risk to the extent your equity exceeds the applicable exemption. In Ohio, that number is $3,775.
In Case You File Chapter 7
Most of your debts are discharged, meaning your legal liability to pay the creditor/ debt has been extinguished in Chapter 7 bankruptcy. In exchange, you must surrender non-exempt property which the bankruptcy trustee will sell and use the funds to pay your unsecured creditors. In Chapter 7, the ability to keep your vehicle is determined by whether or not your equity is classified as exempt and whether or not you are behind on your car payments. An experienced attorney can help you navigate the potential pit falls of filing for bankruptcy with a vehicle that you want to keep or surrender. It is extremely unlikely to have a non-exempt vehicle in a Chapter 7 bankruptcy.
Motion To Redeem Your Car In Bankruptcy
Another way to save your car during bankruptcy is by making a motion to redeem your vehicle. Redeeming your vehicle allows you to purchase it from your lender for its retail value at the time you file. The value that matters is the value of the vehicle at the time you file for bankruptcy. Its likely a lower amount than when you purchased the vehicle.
To redeem your car, you make a motion to the court as part of the bankruptcy proceeding. You must present evidence of the value of the car. Most courts want to see information from Kelley Blue Book or the National Auto Dealers Association. You must also show that you want to keep the vehicle for personal or household use. You must serve a copy of the motion on the car lender.
If the court approves your motion to redeem your car, your car lender must accept a lump sum payment for the value of the car. In the end, you end up with title to the vehicle free and clear. To redeem your car, you must have the funds available to pay your lender for the fair market value of your car. A motion to redeem may be your best bet when your vehicle is worth less than your loan.
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Dealing With Your Vehicle
One of the forms you will file with the bankruptcy court is called the Statement of Intention. In this form, you tell the court what you plan to do with property that is securing a debt you owe, like real estate or a vehicle.
If you own your vehicle but are still paying on the loan, you have a few options on how to deal with it in Chapter 7 bankruptcy.
You can reaffirm the debt, keep your vehicle, and continue making payments. This means the debt will not be discharged and you will continue making monthly payments during and after bankruptcy. If you miss future payments the lender will have the right to repossess the vehicle and possibly try to collect on any deficiency between the balance you owe and the amount they get when selling the vehicle.
If you select this option in your Statement of Intention, your car lender will send you a reaffirmation agreement for you to complete and return. In some bankruptcy cases a reaffirmation hearing will be scheduled.
If you choose to surrender your vehicle, then it will be repossessed and the debt will be discharged in your bankruptcy. Filers with high car payments they can’t afford often choose to surrender their car to get out of the debt.
If You Don’t Want To Keep Your Financed Car In Chapter 7 Bankruptcy You Can Surrender It And Discharge The Car Loan
Updated By Cara O’Neill, Attorney
If you have a car loan or a car lease when you file Chapter 7 bankruptcy, you must choose whether to keep the car and continue to pay for it or surrender it and discharge the debt. This article explains:
- how Chapter 7 bankruptcy works
- how to keep a financed car in Chapter 7
- the pros and cons of surrendering a vehicle, and
- a cosigner’s responsibility after a vehicle surrender.
You’ll also learn about the process involved, including how to inform the bankruptcy court and the car lender of your decision on the Statement of Intention for Individuals Filing Under Chapter 7 Bankruptcy form.
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Chapter 7 Bankruptcy When You Are Still Making Payments On A Car
Chapter 7 bankruptcy will wipe out most unsecured debt.
It can also wipe out secured debt, which is a debt which has collateral attached.
A car loan is an example of a secured debt.
When you buy a car, you borrow money, and the bank that lent you the money files a lien on the title to the vehicle. The car loan is then secured by the car: you cannot sell the car without paying the loan so that lenders lien is lifted. If you fail to make the car payments, that lien on the carthe collateralallows the lender to repossess the car.
When you file for Chapter 7 bankruptcy, if you are making payments on a secured car loan, do you get to keep the car?
In a Chapter 7 bankruptcy, you do have the option to surrender your car.
When you surrender a vehicle in Chapter 7, the lender takes possession of the vehicle that is collateral for the secured loanbut your contractual personal obligation to continue making installment payments is discharged. It is wiped away in the Chapter 7 process, just like any unsecured debt would be.
You do not, however, get to keep the car for free.
However, if you do not wish to surrender the vehicle, typically, in the Chapter 7 process, you will be asked whether or not you wish to reaffirm the car loan.
Reaffirmation means that, during the Chapter 7 process, you enter into an agreement with the vehicle loan lender that the car loan survives the Chapter 7 bankruptcy and is not discharged.
Keep Your Car In Bankruptcy Chapter 13
You dont need to be current on your car loan to keep your car in chapter 13. In fact, chapter 13 is often used to stop repossession and give you time to catch up missed payments. Creditors cannot refuse to accept payment on the car loan if you file chapter 13. If you get behind on your car, and the creditor wont work with you, threatening repossession unless you come up with all the missed payments at once, chapter 13 can help.
In chapter 13, you can cram down some car loans. This is not possible in chapter 7. In a cram down, you pay the value of the car, not what is owed, over the term of the chapter 13 plan. The interest rate will change as well. in 2020, the current interest rate is 5.5% So, of you owe a lot more on your car than what it is worth, and at a higher interest rate, chapter 13 may be an option. To cram down a car, you must have purchased it more than 910 days before you file your bankruptcy .
Should I Get A Car Loan Before Or After I File For Chapter 7
I need to file Chapter 7 and my current car is on its last leg. Should I get a car loan before I file or do I need to wait until after?
afterit will probably drop again once you filebefore
- Borrowing a car from a friend or family member while rebuilding your credit
- Using public transportation
- Saving money for a large down payment
saves $879 a year
Keeping Two Cars In Bankruptcy
You are not limited to one car. You can have two and still file bankruptcy. There is no specific limitation on the number of cars a person may own and keep in bankruptcy. However, there are other limitations that do come into play. The law limits the amount of equity a person can protect. You may protect up to $4,000 equity in one vehicle. This is a per person limitation, and only applies to one vehicle.
For example, if you own one car free and clear and it is worth $4,000, you can protect it with your auto exemption. What if you own another car worth $10,000, but you owe $10,000 on it? It has no equity, and you could keep, and reaffirm it.
When you file bankruptcy to get rid of debt, you still need a car. Most people are relieved when I tell them they will keep their car. Some are thrilled when I advise them to get a different car BEFORE they file bankruptcy. No way around it, you have to have a dependable car. Ill show you options which may shock and surprise you. At a free consultation, you will learn how to keep your car, and all your other property, while getting rid of your debt.
Keep your car in bankruptcy. Wipe out all your other debts, so you can afford to keep your car in bankruptcy.
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What Happens To Your Car In Chapter 13 Bankruptcy
Another form of bankruptcy is Chapter 13, which works a bit differently from Chapter 7. Rather than liquidating non-exempt assets to repay creditors, you’ll enter a debt repayment plan. Your property isn’t sold off with this form of bankruptcy instead, your finances are reorganized and you’ll begin the process of repayment. If you own your car outright you’ll be able to keep it.
You will have a repayment period of either three or five years, and once that period ends, some remaining debts can be dischargedmeaning you don’t have to pay them anymore. Not all debts can be discharged, however. Credit card and medical debt can be discharged, for example, but mortgages and student loans cannot.
When you file Chapter 13 bankruptcy, your debt is grouped into three buckets:
- Priority debts: These must be repaid in full. This includes bankruptcy costs, unpaid tax bills from the past three years, and child and spousal support.
- Secured debts: Car loans are included in this category. If you have a car loan, the amount you owe on it may be reduced in the Chapter 13 bankruptcy process if you owe more on it than its current value. Also, if you can qualify for a repayment plan and get caught up on your loan, you may be able to keep the vehicle.
- Unsecured debts: These will be discharged in the bankruptcy after you’ve completed your repayment plan.
How Much Do You Owe On Your Car
One of the main qualifiers that decide whether or not you can keep your car is the amount you owe on it. Typically, when courts are deciding what property can be sold to creditors, there is a specific process they follow.
The equity in your car is simply determined by the value of the car less the car loan. If the amount that you owe is not enough to cover the equity value of your car, then creditors have the potential to repossess and sell it. Simply put, the value of the car cannot exceed the amount you owe when you file.
If all of the equity value of your car is protected through the motor vehicle exemptions of Virginia, then you can keep your vehicle. This means that your cars market value is exempt to creditors.
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Protecting Your Car’s Equity
When you file bankruptcy, you won’t be left destitute. Each state decides which property its residents can safeguard with bankruptcy exemptions. The state’s exemption list will cover key assets that you’ll need to maintain a home and job, such as clothing, household goods, electronics, work tools, retirement accounts, and, in most cases, some equity in a homestead and equity in a vehicle.
Exemption amounts vary by state. Even so, because most people don’t own high-status items such as recreational vehicles, boats, and luxury cars, bankruptcy debtors can often protect allor at least mostproperty in bankruptcy. What happens to nonexempt property will depend on the bankruptcy chapter filed.
Arlington Heights Bankruptcy Lawyers Warn Filers
Because such reaffirmations can pose risks to the filer, courts must review the terms before they enforce the agreements. If the judge approves the agreement, then it goes into force, and the filer must follow its terms until they pay off the car. If the judge denies it because they feel that the terms are not in the filer’s best interest, then the filer may still get to keep their car.
For more information about how bankruptcy will affect your property, please contact Newland & Newland today. We provide support to clients in Lake County, McHenry County, Cook County, DuPage County, Crystal Lake, Arlington Heights, Barrington, Palatine, Rolling Meadows and throughout Northern Illinois.
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Contact A Bankruptcy Attorney In Cary Nc For A Free Consultation
At Sasser Law Firm, we have three board-certified bankruptcy specialist attorneys and over 20 years of experience practicing exclusively in bankruptcy law. Our bankruptcy attorneys in Cary, NC are prepared to answer questions you have about the bankruptcy process, such as What happens when I declare bankruptcy? or What do you lose in bankruptcy? They strive to be as helpful and objective as possible whether that means filing for bankruptcy or not.
Keeping A Car You’re Still Paying For
If you want to keep a car that you are making payments on, your options will depend on whether you’re current on your payments and whether you can pay the current value of your car in a lump sum payment.
- If your payments are current. You can either pay the lender a lump sum to purchase the car at its current value or enter into a new contract , which lets you keep your vehicle under much the terms as your original car’s promissory note .
- If your payments aren’t current. You can redeem the car if you have the money to do so. If you don’t, you can try asking the lender to enter into a reaffirmation agreement and to include the missed payments in the new payment arrangement. However, your lender is under no obligation to modify your payment when you’re behind.
Some lenders will allow you to keep the car without doing anything other than staying current on your payment. However, you could lose the car without warning because the lender will be able to repossess the vehicle at any time. You’ll want to talk with an attorney about the pros and cons before selecting this approach.
Also, unless you can pay the value of your car in a lump sum payment, you should understand that if you’re behind on your payments when you file, your lender doesn’t have to agree to let you keep the vehicle.
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Does It Depend On The Type Of Bankruptcy
The type of bankruptcy you go with will significantly affect what happens to your car. If you file for Chapter 7, youll be able to keep your vehicle as long as local bankruptcy laws exempt all your equity and youre up to date on your loan payments.
To figure out how much equity you have in your car, take your loan balance and subtract it from the value of your car. Note that if youre close to the end of your term, you may not have a lot of equity as vehicles depreciate quickly.
After you know how much equity you have, find the motor vehicle exemption in your state. If you have less equity than the exemption limit, you shouldnt have any issues keeping your car. Because Chapter 13 involves a debt repayment plan and doesnt liquidate assets to repay creditors, your property wont be sold. This means if you own your car, it will likely be yours to keep.
How Chapter 7 And Chapter 13 Bankruptcy Differ
Chapter 7 and Chapter 13 bankruptcy proceedings offer different approaches to getting relief from unmanageable debt.
Chapter 7 bankruptcy is a liquidation. Under its provisions, the individuals non-exempt assets can be sold off to raise money to pay off debts. Certain property is exempted from liquidation. If the North Carolina exemptions are used, a debtor is permitted a $3,500.00 motor vehicle exemption. Having a lien on your car can shield it from liquidation since that lien reduces the equity in the vehicle. Chapter 7 allows the debtor to discharge certain kinds of unsecured debt.
Chapter 13 bankruptcy is a reorganization. It is also known as a wage earners plan because, under Chapter 13, people with steady income propose a plan to pay all or a portion of their debt over a period not to exceed five years. There are limits to how much debt an individual can have and qualify to file a Chapter 13 bankruptcy.
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