Generally, you must surrender your vehicle within 30-45 days after your 341 creditor meeting.
At Stone Rose Law, our Arizona bankruptcy attorneys may be able to help you keep your automobile if you need to use Chapter 7 bankruptcy. Call us at (480) 498-8998 to speak with a bankruptcy lawyer and get a free consultation.
In this post, we cover the basics of how Chapter 7 relates to your automobile and some ways you can discharge your debts under Chapter 7 without having to give up your car.
Keeping your car in a Chapter 7 bankruptcy is not always possible. There can be some situations in which it can be advantageous to surrender it, such as when you cannot afford to keep making your car payments or if you owe more on a car loan than the vehicle is worth.
But there are several ways you can come out of Chapter 7 bankruptcy with your vehicle still in your possession. Each bankruptcy case is unique, depending upon your financial situation. Most people want to keep their cars, and for good reason.
In Chapter 7, the most common ways people retain possession of their vehicles are:
Let’s take a closer look at each of these three options below.
Under Chapter 7 bankruptcy, you can keep your car if you own it in full (no payments) or if you are current on your car loan payments as long as your car’s value falls within Arizona’s bankruptcy vehicle exemption.
Under ARS 33-1125(8), $16,000 under the state’s personal property exemptions, or $26,700 if you have a physical disability. This amount increases annually based on the increase in the cost of living measured by the U.S. Department of Labor’s cost of living index. If you are married in Arizona, this exemption doubles. This means if you have two vehicles between you and your spouse, each vehicle can be protected up to $16,000.00 in equity. If you only have one vehicle between you and your spouse, your vehicle can be protected up to $32,000.00 of equity.
Your equity is measured by the value of the car minus the balance you owe on the car loan. The current value of the car is measured by how much a person would reasonably pay for it, such as its Kelley Blue Book value.
For example, if the fair market value of the car is $20,000, and your loan balance is $16,000, then your equity in the car is $4,000 and is within the $16,000 equity amount. In this case, you could exempt your car from being sold under Chapter 7 bankruptcy.
If you owe money on a car loan and missed payments, then you cannot use the Arizona personal property exemption to keep the vehicle under Chapter 7.
In this situation, the lender will either request the bankruptcy court to lift the bankruptcy automatic stay to allow it to repossess the vehicle during bankruptcy, or it will use its lien right on the car after bankruptcy to repossess it.
There are several circumstances where you may have too much equity in your vehicle for full protection. Below are a few examples:
What can happen in the above scenarios?
If you have an existing car loan and you are current on your payments, you can arrange with the lender to keep the car as long as you keep up with the payment schedule. This effectively takes the car out of bankruptcy because you are “reaffirming” what you owe on it. This is not always recommended, but is important to have a conversation with your Bankruptcy Attorney if you are considering this route.
You can indicate your desire to retain your car and reaffirm your loan on Official Form 108.
A reaffirmation agreement is a new purchase agreement for the car, usually on the same or similar terms to the original agreement. In some cases, you might be able to negotiate different terms, like reduced payments or a lower interest rate.
Once you agree on the terms of a reaffirmation agreement, the bankruptcy court must approve it. The court will consider your income, how much you will still owe, and the car’s value when making its approval decision. One way to increase the chances of court approval is to have your bankruptcy attorney make a written attestation that the reaffirmation agreement is in your best interests.
If you reaffirm the debt, it remains legally binding, meaning it can be reported to the three credit bureaus and fully collected if you default. If you cannot afford your vehicle, have historically fallen behind on payments, or are unsure of your abilities to pay off the loan in the future, it is not recommended to sign this agreement. If you fall behind on payments, the lender can repossess and sell the vehicle if you owe more on the reaffirmed loan amount than the vehicle is worth, and you will still be liable for the deficiency balance after bankruptcy.
For example, say you reaffirm a car loan on a vehicle that has great sentimental value to you even though you still owe $20,000 on it and its market value is only $15,000. If you fail to keep up with the payments and the lender repossesses and sells the car for that $15,000, you will still owe the lender a deficiency balance of $5,000.
If you owe more on your vehicle than it is worth, a redemption allows you to modify your payment to match the car’s fair market value. For example, if you owe $20,000 to Star Financing on a Ford pickup truck that is now worth $12,000, then you have a right to pay Star Financing only $12,000 and take clear title to the vehicle.
Section 722 of the U.S. Bankruptcy Code provides for redemptions. A motion to approve the redemption must be filed with the Bankruptcy Court. Once approved, you must pay the value in one lump sumTo qualify, you need to meet these requirements:
Like other options, you can indicate your desire to enter into a redemption agreement on Official Form 108.
To pay the lump sum amount you can use other funds protected by a bankruptcy exemption, money that you earned, has been given to you, or borrowed after filing for bankruptcy. There are third parties such as-your bankruptcy atttorney can provide redemption loans.
Sometimes, you may not want to keep a car you are financing when you petition for bankruptcy. Under bankruptcy law, you may be able to voluntarily surrender the vehicle back to the lender, which is effectively a voluntary repossession. You can indicate your desire to surrender property on Official Form 108.
After you submit Form 108, the vehicle lender will be notified of your intentions.
If the trustee does not object to the vehicle surrender, the lender will repossess 30 to 45 days after filing. They will sell the vehicle and apply the sale proceeds to what you still owe on it. Any amount that is not paid through the sale of your vehicle will be discharged in your bankruptcy.
If the sale amount does not at least equal how much you owe, you will not be liable for the deficiency. It is discharged under the Chapter 7 bankruptcy.
You may keep a car you are leasing even if you file a Chapter 7. As long as you are current on your lease contract, the bankruptcy will not trigger a repossession of your leased vehicle. Leases are listed on Schedule G, where you will indicate to the creditor if you wish to “assume” the contract or “reject the contract.”
Chapter 7 may not be available to you to keep personal property, including your vehicle. For example, to qualify for protection under Chapter 7, you must pass a means test. If you have too much income and assets to use Chapter 7, Chapter 13 bankruptcy may be your better option.
Instead of liquidating assets, Chapter 13 bankruptcy has “liquidation value.” The liquidation value is the amount that could be liquidated in a Chapter 7 filing. For example, if you had an extra unexempt vehicle worth $10,000.00, this would be the liquidation value in Chapter 13. You must pay a minimum of $10,000.00 to your unsecured creditor over three to five years through your Chapter 13 repayment bankruptcy.
Chapter 13 can be a smart choice if you have assets at risk in Chapter 7 and can’t afford to pay the Trustee to keep them. Unlike Chapter 7, there’s no seizure of unprotected property. However, you’ll need enough income to cover the minimum payments required for a Chapter 13 plan. To find out what that amount might be, it’s best to consult with an experienced bankruptcy attorney.
Chapter 13 is also a great option if you are behind on car payments because it allows the reorganization of debts. If you have a car loan you are behind on, the car loan will be paid back over a three to five-year period. Vehicle loans are always one of the first creditors to be paid and the automatic stay will protect you during the entire three to five years. The vehicle lender will receive monthly payments from your Trustee and cannot repossess if you propose to pay off the loan in your plan. Once you complete your payment plan, you will own the vehicle.
If you are in jeopardy of a vehicle repossession because you defaulted on a car loan, or a collection agency threatens you with involuntary repossession, contact Stone Rose Law. We can help you keep your car through Chapter 7 or Chapter 13 bankruptcy.
If you are worried about losing your car through bankruptcy, call us for a free consultation with an experienced Bankruptcy Attorney.
Considering bankruptcy is a serious decision that can have long-term consequences on your credit score and affect your ability to finance an auto loan with future lenders. In a free consultation, we can help you decide if bankruptcy is right for you, whether to file bankruptcy under Chapter 7 or Chapter 13 and help you get started gathering the information you will need to file a petition.Fill out our online form to ask us a question about your car and how you can keep it, or call us at (480) 498-8998 to talk with an Arizona bankruptcy attorney today.
