In a Bankruptcy, Can I Keep My Car If I Still Owe Money on It?
Bankruptcy is often a last resort for people in dire financial circumstances. Often, those who do need to file worry that they'll lose their homes or their vehicles in the process. If you need to file bankruptcy and want to keep your car, there are ways to do so -- but how you do it will depend upon your ability to repay and the type of bankruptcy you file.
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The Purpose of Bankruptcy
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There are a few reasons individuals file bankruptcy. You may have too much unsecured debt, such as credit cards and medical bills, and not enough income to repay it. You may have had a vehicle repossession or a home foreclosure, and the bank is asking you to pay them a deficiency balance. You may simply be behind on a house or a car payment. You may have any combination of these factors. A bankruptcy can help you discharge your unsecured debt and either discharge or reorganize your secured debt.
Secured Debt vs. Unsecured Debt
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Unsecured debt is any debt that is not secured by a lien. Credit cards, personal loans and medical bills are examples of unsecured debts. Unsecured debts can generally be discharged in bankruptcy, wiping out your legal obligation to repay them.
Secured debts are debts that are secured by a lien on property, such as a judgment lien, a mortgage or a car lien. If you don't pay a secured debt, the creditor can take the property to satisfy the debt. Secured debts can only be discharged in bankruptcy if you surrender the property to which the lien is attached.
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Keeping a Car in Chapter 7
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If you file a Chapter 7 bankruptcy, you can keep your car if you're current on the car payment, if you show that you can afford it and if the payment is not unreasonably high. In a Chapter 7 case, you will be required to enter into a reaffirmation agreement pursuant to section 524 of the Bankruptcy Code. A reaffirmation agreement is a binding contract in which you agree that your car loan will survive the bankruptcy. If you execute a reaffirmation agreement, you are responsible for the car note as if you had never filed bankruptcy.
Both you and the lender must sign the agreement. The court may deny the agreement if the judge determines that you're behind on your payments; that the agreement is unnecessary; or that the agreement will cause you undue hardship.
Keeping a Car in Chapter 13
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In a Chapter 13 case, you will propose a repayment plan. Once the court and your creditors accept the plan, you will pay a Trustee, and the Trustee will pay your creditors. Secured creditors are generally paid the entire balance of their claims with interest; unsecured creditors, meanwhile, are only paid a percentage of the balance owed, and the rest is discharged.
If you're behind on your car payments and want to keep your car, a Chapter 13 bankruptcy can enable you to do so. Paying your car payment through the Chapter 13 plan can be very beneficial if you purchased your car more than 910 days prior to the filing of the bankruptcy. In that case, you can propose what is called a cramdown -- you will pay only the fair market value of the vehicle as a secured debt with interest. The balance above the value is treated as an unsecured debt and only paid a percentage. For example, if your car is worth $2,000 and you owe $5,000, and you bought the car more than 910 days before filing the bankruptcy, you will only have to pay $2,000 with interest, and the remaining $3,000 will be treated like a credit card and only receive a percentage. However, if you purchased your car within the 910 days prior to the bankruptcy, you must pay the entire claim as a secured claim with interest.
If you're current on your car payment but file a Chapter 13 case for other reasons, you can pay your car payment outside the Chapter 13 plan, directly to the creditor.
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