By: John Lee

One of the questions I hear the most as a Bankruptcy attorney is, “Can I keep my car in bankruptcy?”

To which I reply, “Most of the time you can keep your car in bankruptcy.” There are several factors to consider when determining if one can keep their car in a bankruptcy. The two primary factors to consider are (1) is there unprotected equity in the car; and (2) is the debtor current on the car payments. Once I have the answer to these two questions, then I begin to look at factors like (3) when the car was purchased, (4) is the lien validly recorded and (5) are there any cross collateralization issues.

To determine if there is unprotected equity in the car, you first look at the NADA to determine the value of the car.

Then you subtract the balance owed to the creditor on the car from the value of the car. If there is positive equity after subtracting the value of the lien, then you look to Virginia’s Exemptions to determine if after the exemption there is still equity. Most of my clients do not have unprotected equity in their car after subtracting the lien amount and the exemption from the NADA value.

The next major factor to consider is whether the client is current on his car payments.

If the client is behind on his car payments, then the creditor can still repossess the car pursuant to their lien, even after a bankruptcy is filed. Bankruptcy will discharge the debt associated with the car, but, in most cases, the bankruptcy will not extinguish the lien the creditor has against the car. I advise all of my chapter 7 clients to remain current on their car payments if they want to retain their car.

Another factor to consider when determining if a client should keep their car is whether the client has financed the car through a credit union.

Credit unions have cross-collateralization clauses that allow them to attach otherwise unsecured debts (like credit cards) to the car. This means if you have a car that is being financed through a credit union and you also owe the same credit union money on a credit card; the credit union could refuse to release the title of the car to you if you are behind on the credit card payments. In many cases, if a client has a large credit card balance owed to the credit union that has financed their car; I advise those clients to surrender the car back to the credit union.

Another way a client can lose the car in bankruptcy is if the secured creditor’s lien is not properly recorded.

This normally happens when the debtor purchases the car and the DMV or car dealership fails to properly record the lien at the DMV. In this case, even though the debtor has done nothing wrong, he may loose the car to the Chapter 7 Trustee because the fact that the lien is improperly recorded creates unprotected equity that the Trustee can access for the benefit of the creditors.

Keeping Your Car in Chapter 13 Bankruptcy:

After explaining these concepts to a client, the next question may be, “Can I keep my car even if I have equity or if I am behind on my payments?” To this I reply, “Yes, in a Chapter 13 bankruptcy you can keep your car even if you are behind on your payments or if you have equity.”

In Chapter 13 Bankruptcy the Court will allow a debtor to keep his car even if he has fallen behind on his car payments. The court will allow the debtor to restructure the debt attached to the car in a Chapter 13 plan. In many cases a Chapter 13 debtor can lower the interest rate on his car, the monthly payment can be reduced and the term of the loan be stretched out another 60 months. In some cases the principle balance of the debt can be “crammed down” to the actual value of the car.

Also, debtors that would be looking at possibly losing their car in a Chapter 7 Bankruptcy because of having too much unprotected equity can keep their car in a Chapter 13 Bankruptcy.

In many cases a bankruptcy can help you keep your car, lower the interest rate on the car financing and lower your car payments. If you are concerned that your car may be repossessed soon please call the Law Offices of John W. Lee, P.C. and see what we can do to help protect your car.

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