Most of our society is car-dependent, so there’s little wonder most of our clients come to us with many concerns about protecting their ability to drive during and after the bankruptcy process. Philadelphia has an extensive public transportation system, but it’s not sufficient to meet the needs of every client.
Fortunately, bankruptcy law and bankruptcy judges alike recognize the pivotal role car ownership plays in our society. For the most part, clients who drive have very little to worry about.
You May Be Able to Keep Your Car
Much depends on the type of bankruptcy you file and the amount of equity you own.
If the car is paid off and worth less than $3775 you can keep it even in a Chapter 7 bankruptcy, and do so with ease. Federal law makes up to $3775 in vehicle equity “exempt” property, which means it can’t be seized and sold off to pay for your debts. Pennsylvania law doesn’t have a vehicle exemption, but allows you to use federal exemptions if you wish.
If the car is worth more than $3775 you might have to sell it; you’d be allowed to keep the $3,775 to purchase another car but the rest would go towards paying your debts. You could also negotiate with the trustee to pay them the difference, so you can keep your existing car, so the amount the car is worth might come into play.
If it’s worth $4,500, for example, it might be worthwhile to come up with the additional $525 so you can keep the car you’re used to. If it’s worth $10,000, and paid off, you might want to look at a Chapter 13 bankruptcy, which offers more flexibility. Of course, if you have that much equity in your vehicle you’ll probably end up in a Chapter 13 bankruptcy anyway as you might not pass the ‘means test’ which would allow you to file Chapter 7.
If you still owe money on your car much will depend on whether you’re current on your auto loan.
Keep in mind that protecting assets is one of the primary reasons why you would want to turn to an attorney for bankruptcy advice in the first place. It’s our job to evaluate your entire situation, and to suggest both the type of bankruptcy and the approach which will help you hold on to any asset you want to protect. We can also give you advice about whether the asset is worth protecting in the first place. Sometimes it’s smarter to give up the car in the short term to place yourself in a better situation in the long run.
Cram Downs May Let You Pay Less than You Owe
Vehicle values tend to depreciate long before auto loans are paid off. If you’re upside down on your car loan you may be able to reduce the amount of debt you owe your financing company.
The vehicle must be at least two and a half years old. The debt could be reduced by bringing interest rates down; there are also ways to reduce the debt to the amount the vehicle is worth, versus the amount that has accrued through interest and fees. This option can reduce your monthly payments and bring them down to manageable levels.
This option is only available to debtors who are reorganizing under a Chapter 13 bankruptcy.
You should not feel bad about reaching for this protection! Many auto loans are downright predatory.
It Won’t be a Problem to Get a Car Later
Some debtors really do find it’s worthwhile to let the car go in the short term to make the terms of their bankruptcy as favorable as possible. Others find themselves driving very poor used vehicles during the bankruptcy. Either way, the feasibility of obtaining a new auto loan is a common concern for many of our clients.
Fortunately, most of our clients find themselves receiving dozens of auto loan offers within a week of their discharge. Auto lenders know you can’t file bankruptcy again for many years, so they are eager to be your first lender. Just make sure you pay close attention to terms and interest rates before locking yourself into a new loan, and make sure your new payment is something you can handle. Your post-bankruptcy auto loan can be a cornerstone for rebuilding your credit, but only if it doesn’t get you into trouble all over again.