My clients who are looking at bankruptcy as a way to get out of debt worry about their car. Is it a good idea to get rid of it in favor of a less expensive vehicle? Will either the court or their car lender force them to surrender the vehicle?
Cities such as New York, Boston and San Francisco have amazing public transit systems but that’s the exception rather than the rule. For many people, the possibility of being left without a car makes bankruptcy a non-starter.
Luckily, with enough planning you should be able to keep your car even as you go through bankruptcy.
Do You Want to Keep The Car?
Before making a firm decision on keeping this particular vehicle, consider the following:
Value. A car loses a significant chunk of value the minute it rolls off the lot, so there’s a fair chance that it’s not worth the balance on the note. Look at how much the car is worth on a trade-in or private party sale – if the car is valued at less than the payoff amount on the loan, it may be a better financial move to give it back to the finance company.
Costs of Ownership. Driving around a gas guzzler or a car with high maintenance costs? If so, it may be an unnecessary drain on your monthly budget. Giving it back and getting a different vehicle could end up saving you a lot of money, which will make it easier to stick to your monthly budget. Spend some time with a cost of ownership calculator to guide you.
Hassle Factor. If you live in an urban area where mass transit is plentiful and parking is difficult, consider how much effort you put into owning your car. When I lived in New York City I spent an inordinate amount of time looking for parking, and parking tickets were a fairly usual occurrence. Unless you need absolutely need the car, it may be more of an ongoing financial burden than it’s worth.
Does It Help Improve Your Finances After Bankruptcy?
There’s one more consideration when you’re deciding to keep the car through your bankruptcy case – whether it stands in the way of getting your finances back in shape once the case is over.
If you’ve got a huge car payment and high insurance premiums, this particular automobile might be what’s dragging you down financially.
A ticket or an accident will raise your insurance rates, so take a safe driving class to reduce your premium. Also look into discounts that may be available with your insurer under a multi-policy discount. Finally, shop around for a better auto insurance rate.
As to your monthly payments, see if you can refinance with a bank or credit union with a lower rate. This may not be an option if your credit score has already taken a nose dive due to your other debt problems, but it can’t hurt to ask around.
Doing a bit of digging will go a long way towards helping you understand if there’s any way you can lower the costs associated with this automobile. If so, then it may make sense to work to keep the car through a bankruptcy filing. If there’s no way to bring your costs down, it may be a better idea to give it back.
How Much Will A Replacement Cost?
Cars are built to last 200,000 miles or more with proper care, and they must all meet certain safety standards.
You do not need a brand new car. I don’t care what the automobile manufacturers say, there’s no justification for buying a brand new car aside from that new car smell and the envious looks your neighbors give you when you drive past them in the morning.
With that in mind, take a look around at the cost of a replacement car that meets your needs (as opposed to your wants). If you’ve got kids, you have certain needs. If all you do is drive to the train station in the morning, your needs are markedly different. Shop based on those requirements, taking care to search not only car dealerships but also places like Craigslist and neighborhood newspapers and websites.
Once you’ve got a sense of the real cost of a replacement car, you’ll know whether it’s a better idea to keep the car or not.
You Will Not Lose Your Car In Bankruptcy
Under Chapter 7, you wipe out many types of debts but can keep property only to certain limits. Depending on the limits in your area, you wouldn’t file a Chapter 7 case unless you want to keep the car and know it will be protected.
Chapter 13 is a different story because it involves paying off a portion of your debts over a 3-5 year period in exchange for the ability to keep all of your property. If you want to keep the vehicle but it’s valued above the limits then you’d look into filing a Chapter 13 case.
Before doing so, be sure to do a complete analysis of your finances to determine how much you’d be required to pay towards your debts, and whether you can afford to do so.
Protecting Your Car From The Lender
Under normal circumstances keeping your car is simple. All you need to do is make your payments on time, maintain proper insurance, and don’t total it in a wreck.
In bankruptcy, the story may be the same or different depending on where your case is going to be filed. In some states, filing a Chapter 7 case gives the car lender the automatic right to call the loan in default and repossess the vehicle. Remember that under Chapter 13 your property is protected so long as you’ve got an appropriate repayment plan in place.
You can terminate the loan and give the car back, owing no further balance once your bankruptcy case is finished. But if you want to prevent the lender from taking back the vehicle, you get a few choices.
Reaffirmation. Reaffirmation is a new promise to repay the car loan in spite of your bankruptcy filing. The lender sends you an agreement, you sign it, and the bankruptcy court approves it.
So long as the agreement is filed with the court within the time provided for by law and in a specific form, reaffirmation will protect you from waking up one morning to see the lender’s tow truck hauling your car away. You may even be able to renegotiate your interest rate with the lender as part of the reaffirmation process.
The major problem with reaffirmation that if you fall behind on the loan once the agreement is signed and after your bankruptcy case is over, the lender can pursue you for the unpaid balance under state law.
Official Bankruptcy Forms:
- Reaffirmation Agreement Cover Sheet
- Reaffirmation Documents
- Reaffirmation Agreement
- Motion for Approval of Reaffirmation Agreement
- Order on Reaffirmation Agreement
- Order on Reaffirmation Agreement (Alt.)
Redemption. The bankruptcy law lets you pay the lender an amount of money equal to the current value of the vehicle as payment in full. That can be handy if your car is worth far less than the loan balance, or if the interest rate on your current note is high.
Though you may not have the money handy, there are a number of lenders that do redemption financing for people in Chapter 7 bankruptcy. Shockingly, their rates are often better than you’d imagine.
Do Nothing. Some lenders won’t repossess the vehicle after bankruptcy so long as you keep making payments retain proper insurance. You don’t want to choose this option unless you’re certain of the lender’s policy.
Don’t Shortcut Your Decision Making Process
The decision is more than merely one of whether you can file for bankruptcy and keep your car. Keeping the vehicle is no problem so long as you file the right kind of bankruptcy case and follow proper procedures to protect yourself.
The bigger question is one of whether it’s a good idea to have a car, and whether this particular automobile is the right one for your needs and financial situation. Evaluate your budget as well as your alternatives before choosing on a particular course of action, because your choice will have long lasting effects on your budget long after the bankruptcy case is over.