Seeking Clarity on Car Ownership in Chapter 7 Bankruptcy

Posted by Skyseo Roundtable on May 19th, 2023

Can I Keep My Car Under Chapter 7 Bankruptcy?

If you are declaring Chapter 7 bankruptcy in New York, there are things you need to know when it comes to your car.

In every Chapter 7 Bankruptcy, a Trustee is appointed to administer you case. When you file

Chapter 7, all property that you own as of the filing date belongs to the Trustee. While in Bankruptcy, you cannot sell any of your property. Part of the Chapter 7 Trustee’s responsibility is to liquidate and sell what is considered “nonexempt property” in order to satisfy the claims of your creditors.

When it comes to motor vehicles, the Bankruptcy Code allows you to retain your vehicle under certain situations.

You Own Your Car Outright

Suppose that you own a motor vehicle that is fully paid off and you own outright. Can you keep it in a Chapter 7?

The answer to that question depends upon what the fair market value of the vehicle is. Under New York Law, a Bankruptcy Debtor can retain a motor vehicle with equity up to ,825.00. You may be able to exempt an additional ,175.00 of equity under the applicable New York Wildcard Exemption. If you are a handicapped individual, you can exempt up to ,000.00 under New York State Law.

If you were to use the federal exemptions under the Bankruptcy Code, you could exempt up to ,000.00 in equity, and if applicable, up to an additional ,900.00 under the federal “wildcard” exemption.

If you fall within these parameters, you should be able to retain your motor vehicle

If your car’s value is just a bit higher than state or federal exemptions allow, you may still be able to keep your car if the bankruptcy trustee determines that the costs of selling your car isn’t worth the time or effort.

If your car’s value is substantially higher than the state exemptions allow, it will be taken and sold by the trustee. You of course, can attempt to “buy back” the Trustee’s interest in the vehicle and keep it.

Your Car is Financed

Suppose however that your car is financed, and you are paying the monthly payments due to the bank under its lien against the vehicle. Can you still retain the car in a Chapter 7 Bankruptcy? The answer is yes, with some qualifications

Reaffirm- If your car payments are up to date, and you are able to continue to make your monthly payments, (and your car’s equity falls within the exemption parameters referred to above), you should be able to keep your car in a Chapter 7 if your car is financed. But what happens to the Bank’s lien on the vehicle?

Valid liens are respected in bankruptcy. Your loan was set up using your car as collateral. If you fail to pay back this debt, your bank has the right to repossess your car. In order to retain the vehicle, you must continue to make the monthly payments due to bank on its installment sales contract. If you do not, the bank can seek Bankruptcy Court permission to repossess the car from you for non-payment. So how do you maintain your contractual payments to the bank in a Chapter 7 bankruptcy?

By executing what is called a Reaffirmation Agreement with the Bank. According to the Reaffirmation Agreement, you agree to make the monthly payments to the bank. You usually (but not always) must obtain Bankruptcy Court approval of a Reaffirmation Agreement. Once approved, you continue making the monthly payments to the Bank. So long as you do that throughout the contractual term of the agreement, you will be able to keep the car.

An important consequence of executing a Reaffirmation Agreement is that you are waiving the ability to discharge this debt in Bankruptcy. If, post-bankruptcy, you default under the Reaffirmation Agreement and the Bank sells the car for an amount insufficient to satisfy its loan, the Bank can sue you personally for the deficiency on any amounts still owed to it. This debt will not be discharged in bankruptcy, and you will still be personally responsible for it.

Redeem- Redemption is another option to enable you to retain your motor vehicle. Redemption is only available in a Chapter 7 Bankruptcy. Redemption permits you to satisfy the Bank’s lien on the vehicle by paying it an amount equal to the car’s value. Unfortunately, redemption is not often used in a Chapter 7, in that it requires to pay off the Bank’s lien in a lump sum and not over time.  Most Chapter 7 Debtors do not have the financial wherewithal to accomplish this task.

You also need Bankruptcy Court approval in order to redeem the car. There is a possibility that the Bank may oppose this Motion. Suppose the Bank is owed ,000.00 on its lien but you claim that the fair market value is only ,000.00. The Bank may contest the value you assigned to the vehicle and claim that its fair market value is higher, requiring you to pay a large lump sum in order to redeem the vehicle.

Surrender- Suppose there is no equity in the car to warrant a sale by the Trustee and you no longer wish to keep making the monthly payments to the bank. In that case, you can make arrangements  with the bank and surrender the vehicle to them. The Bankruptcy Code requires you to surrender your vehicle if you have not redeemed or entered into a reaffirmation agreement with the Bank within 45 days of when the Trustee examines you at the Section 341 Meeting.

Your Car is Under Lease

Suppose you own a leased vehicle and there are payments remaining to the lessor under the terms of the lease at the time of your Chapter 7 Bankruptcy. If you feel that you can continue the monthly payments on the lease, and you can pay any agreed upon fees (for excess milage or vehicle damage), the courts should be willing to allow you to assume the lease. By assuming the lease, you are agreeing to make the payments due under the lease to the lessor in order to retain the vehicle.

Moreover, the consequences of assuming the lease are similar to that of reaffirming a car loan debt. If you default under the lease post-Bankruptcy, the Lessor will be entitled to repossess the vehicle from you. Moreover, if the vehicle is then sold, and the sale proceeds are unable to satisfy the sums due under the terms of the lease, the lessor can then sue you personally to recover this debt from you.

If you would like to learn more about your car and the Chapter 7 process, click here - https://www.ny-bankruptcy.com/nassau-county-bankruptcy-keep-car/

The key factors that affect your ability to keep your car include whether you owe money on it, whether you can pay what you owe, how much your vehicle is worth, etc. Since there are so many variables, the best option you have is to contact an experienced bankruptcy lawyer to get advice on your particular situation. Reach out to New York bankruptcy attorney Ronald D. Weiss, P.C. for a free consultation. He can tell you what you need to know about Chapter 7 bankruptcy, and help you get your case started. Call 631-271-3737 and take the first step to a fresh start.