Consumer Bankruptcy:

Keeping Your Car

Cars are difficult to deal with under bankruptcy laws, and obviously the way they are dealt with differs in Chapter 7 and Chapter 13. In the latter, if they wish to keep their cars, debtors are forced to pay off all of their car loans, if the car was purchased within 910 days (two and a half years) of the date they filed for bankruptcy. For example, if you had a car loan with an outstanding balance of $4,000 but the blue book value of the car was only $2,500, you would still be required to pay off the entire $4,000 (or lose the car). That is, keeping your car when filing for Chapter 13 bankruptcy involves paying the full amount owed on the car and not simply the amount the car is worth. 
Chapter 7 is also difficult, and has become stricter than it formerly was. If you wish to keep your car, you are required to pay the lender the retail value of the car, rather than the value from private sale, which would be less and was formerly the law. The debtor can still surrender the car if making the payments becomes impossible. 
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) provides an official way to assume a lease for personal property, such as a car, if you are filing for Chapter 7. If the lease is not assumed by the case trustee within 60 days of its being filed, it will be deemed rejected. You, the debtor, may then notify the creditor that you wish to assume the lease. It is then at the discretion of the creditor if they allow you to assume the lease and on what conditions they would allow this to happen (typically the payment of outstanding debt). You then have 30 days within which to respond, informing the creditor that you have assumed the lease.
 There is, in some places, a fourth option, which may be agreed upon informally (the primary three options are (redemption, reaffirmation or surrender). This options is for the debtor to continue, along the terms of the original contract, making the payments on the loan or lease.   This option was officially done away with by BAPCPA and consequently many car lenders force the debtor to chose between the official three options. However, other car lenders may consider allowing the fourth option. 
It should be noted that the “means test” for Chapter 7 debtors, as well as the disposable income calculation for above median Chapter 13 debtors, deal with car loans in a strange manner. In order to assess the expense deduction for a secured debt, you need to add up the payments for the next 60 months and divide the total by 60, in order to reach the deduction. In order to understand how the results of this could be unfair, consider what would be happen if someone only had 6 payments left to make on a 6 year old car; only one tenth of the actual monthly payment would be able to be deducted, even though a new car may be needed in the near future. That said, a lawyer cannot advise that you purchase a new car before you file for bankruptcy, because Congress prohibits “debt relief agencies” to recommend that individuals incur new debts. Just keep this problem in mind when you are considering your needs, bankruptcy, and car loans.

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