Dealing with Vehicles and Other Financed Items in Bankruptcy

A loan for financed items such as vehicles, appliances, and televisions works very much like a mortgage loan. It is secured debt. The item you purchased on credit (the car or appliance or television) is the lender’s collateral or security interest on the loan. If you don’t meet your payment obligations, your lender can seize the vehicle - only, instead of calling it foreclosure, we call it repossession.

How repossession works

Laws about repossession vary from state to state, but in most states a lender can repossess a vehicle without notice as soon as even one single payment has been missed. They may not use physical force to do so, and they may not do what is known as “breach of peace.” But they may come on to your property to seize the automobile, and in some states they are even allowed to remove it from your closed garage.

In most cases, your lender will then sell the car to recover some or all of the balance owing on your loan. State laws vary about repossession sales: whether your lender is required to give you notice of the sale, and if and how you have the right to reinstate the loan. Since automobiles depreciate, in many cases the sale of the car will not cover the balance owing on your loan (plus any penalties or other costs the lender incurred through the repossession). If the sales price doesn’t cover that balance plus costs, you will likely be liable for the balance, which is known as the “deficiency.” In most states, your lender can then sue you to recover that deficiency balance.

There are ways to get your car back if it has been repossessed, but they are not easy for most people. These include:

  • redeem the car, which means paying out the full value of the loan plus penalties and costs, if you can come up with the funds to do so
  • buy the car back, if you are able to when it goes up for auction - but even if you do so, you are still liable for the deficiency balance owing on the loan (so in the end you are not getting the car for anything cheaper than what you owed in the first place)
  • reinstate the loan, if your state allows that, which means catching up on all arrears and fees and penalties, then continuing to make your remaining car payments on time (or your car will get repossessed again)
  • file for bankruptcy - options which we will discuss below.

In most cases, it is quite hard to get your car back permanently after repossession. If you know you are going to be late on a payment, your best option is to discuss that with your lender as soon as you realize that, to see if they are willing to negotiate alternate payment terms that you can meet - before it comes to repossession.

Bankruptcy and repossession

If you are already late on your car payments, and your lender has not yet repossessed your car, you know that they could turn up at any moment to do so. Unless you can settle up your arrears and penalties right away, your best bet for avoiding repossession is to file bankruptcy right away. As soon as you file, the automatic stay will prevent your lender from taking any action to collect on debts - and that includes seizing your car.

At very least, filing bankruptcy and having the automatic stay imposed will buy you some time. Chapter 7 bankruptcy is not the best way to deal with a vehicle that may be repossessed or that has been repossessed, because it does not provide any means within it for catching up on the missed payments and other charges owing. If you have the means to catch up on the arrears, you may be able to negotiate with your lender to pay all of those costs and reaffirm the loan, and keep the car.

Alternatively, through Chapter 7 you may choose to surrender the car. Yes, that means losing the car - but the advantage here is that you will no longer be responsible for the balance owing on the loan. That deficiency will be discharged through the bankruptcy.

If you do want to keep your car, your best bet is to file Chapter 13. This will require that you continue making your monthly car payments according to your loan agreement, and also that you catch up on all of your arrears through the course of your Chapter 13 repayment plan. For example, if your regular car payments are $250 per month, and you owe $1,200 in missed payments and penalties and other costs, you will have to repay that $1,200 over the 60 months (five years) of your repayment plan: an additional $20 per month. So your total payments for the car through the course of the repayment plan will be $270 per month.

Filing Chapter 13 to get back a repossessed vehicle

Even if your car has already been repossessed, you may be able to get it back if you file Chapter 13 - provided that you do it quickly. Your lender will probably sell the car within a couple of weeks of repossessing it, and once it has been sold to a third party you cannot get it back. However, if you file Chapter 13 before it has been sold, the automatic stay prevents your lender from being able to sell it.

In most cases, once you have filed Chapter 13, your lender will voluntarily return the car to you, as long as you pay the repossession costs. If they don’t, you will most likely be able to get the bankruptcy court to order that they return it to you - although that may take a few weeks. Make sure you keep making your monthly payments after you file, even if you are behind on previous payments. These payments are considered as “adequate protection” payments, which cover the fact that the car is depreciating as the process goes on.

Then, keeping your car is just a matter of coming up with a Chapter 13 repayment plan, and meeting the terms of that repayment plan. Your lender will be bound to the terms of your repayment plan, and can take no further action against you as long as you are making your scheduled payments on time.

Reaffirmation agreements

Bankruptcy discharges debts that you owe: you are no longer responsible for paying them, and your former creditor can never come back to you to try to collect on those old debts. A reaffirmation agreement is an agreement with your creditor to pay that debt anyway. Is that a smart thing to do?

In some cases, it isn’t. The idea behind shedding debts is to get a fresh start, a second chance. In particular, in the case of unsecured debts such as credit card debt - it may be tempting to sign a reaffirmation agreement with your credit card company so you can keep the card. However, in nearly all cases this is the type of debt you should not keep: fully dischargeable unsecured debt, and at a high interest rate to boot!

For secured loans, though, such as your home mortgage or you car loan, in some cases it might be wise to consider reaffirming the loan. For one thing, remember that although bankruptcy extinguishes the debt, it does not extinguish the lien. So, although you may have had your mortgage debt discharged, there will still be a lien against your home. Even though the debt has been discharged, if you stop making your monthly payments, your lender can still initiate foreclosure. And you will never be able to sell that home without settling that lien.

Similarly, in the case of a car loan, your debt to the lender will be wiped out by the bankruptcy, but they will still retain their lien on your car. As soon as your automatic stay is lifted - which could be one or two months after filing if they file for relief from the stay, or in three or four months once you receive your discharge - if you are not making your monthly payments, your lender may come and repossess your car, because you are not meeting the terms of the original loan agreement.

Should I reaffirm my debts?

In the case of unsecured debt, the answer is nearly always: No. Do not reaffirm any unsecured debts. If you are unsure of why, or if you think that it makes sense in your case to reaffirm an unsecured debt, be sure to discuss the specifics with your attorney before you sign anything.

In the case of secured debts - in particular your home and your car - it may make sense to reaffirm the loan.

If you are going to reaffirm a debt, this must be done through the bankruptcy court. You will have to fill out Form 27 (the reaffirmation cover sheet) and Form 240A (the reaffirmation agreement). The bankruptcy judge will review whether the reaffirmation is in your best interests, and rule whether to approve it or not.

Reaffirming your mortgage

If you want to keep your home, and you can afford to make the payments (which may be much easier to do, once many of your other debts have been discharged) it may be a good idea to reaffirm your mortgage agreement. This means signing a legal contract with your lender stating that you intend to adhere to the original terms of the loan. You may even have the option to negotiate new, more favorable terms to the loan, such as a lower interest rate or lower monthly payments.

You must either be already current on your mortgage payments, or be able to make up missed payments and penalties, in order to reaffirm your mortgage.

If you do not reaffirm your mortgage, but you continue to make your monthly payments on time, your lender will not be able to foreclose on you. This is the option known as “riding through” the bankruptcy, which we discussed in the article on Chapter 7 bankruptcy. This can be a great solution for as long as you want to stay in the home - but, since there is still a lien registered against the home, you will not be able to sell the home or refinance it without settling that lien. Reaffirming your mortgage will probably have more positive effects on your credit score than riding through because, by reaffirming, your payments will show up on your credit report.

Reaffirming your car loan

Chances are that, if you do not reaffirm your car loan, your lender will repossess the car as soon as the automatic stay is lifted - since the original terms of the loan are not being met. In this case, if you want to keep the car you will have to sign a reaffirmation agreement.

It’s important not to become emotionally attached to the car. Instead, think rationally about what is your best option. For example, if the balance you owe on your car loan is more than twice what the car is worth, you might be better off surrendering the car than committing to pay that loan. However, if your payments are affordable and the balance owing is not too high, then it probably will make sense to sign the reaffirmation agreement. Also, if you cannot continue to work and earn a living without your car, it may make more sense to reaffirm the loan. Some lenders may allow you to ride through a bankruptcy with your car loan: in other words, agree not to repossess your car provided you are making your monthly payments, even without reaffirming the loan.

Assumption of lease

What if you don’t actually own the car, but are just leasing it?

Car leases come under the category of “Executory Contracts and Unexpired Leases,” so they must be listed in your Schedule G form. You must also indicate what you intend to do about the lease in your Statement of Intentions. Your choices are either to assume the lease, or to surrender the car.

First, the trustee will review the lease, and decide whether to assume the lease on behalf of the estate, or reject the lease. In most cases of a car lease, the trustee will not want to assume the lease. They will only assume the lease if they see that they can make money from it, for example if they could lease the car to someone else for a much higher price, gaining income which then could be distributed to creditors. In general, in the case of a car lease, the trustee will reject the lease - which means that the lease then goes to you, and the option you indicated on your Statement of Intentions.

If you chose to assume the lease, then you should first review all of the terms, to make sure that you really can afford it. (Remember, there may be additional terms about maximum mileage or residual fees). If you still want to assume it, then you must contact your lessor and tell them that. If the lessor agrees, you must catch up on any outstanding payments or fees right away, and notify them in writing that the lease is assumed.

If the lender doesn’t agree, and you cannot come up with terms that are satisfactory to both you and them, then the lender will probably end up repossessing the car. Note that the lender may not respond to you at all. Do not take their silence as agreement! Keep trying to make contact with them, as they may already be taking steps to repossess your car.

Read on for our next article in this series: How Chapter 7 Bankruptcy Works