Filing Bankruptcy with a Car Lien
In 2005, the United States Congress made significant changes to the nation’s bankruptcy laws. In the end, secured creditors – car finance companies, mortgage companies and seller-financed furniture dealers – fared best, but one particular change continues to make a big difference to individuals considering filing for bankruptcy.
In some situations, an outstanding car loan – and, therefore, a lien on your car – can be helpful if you are filing for bankruptcy. Having an obligation to make car payments may increase your debt to the point that you qualify for Chapter 7 or reduce your disposable income so that you have a lower monthly payment under a Chapter 13 filing.
Let’s take a look at bankruptcy and car liens and what happens to car liens when filing for bankruptcy.
How Chapter 7 and Chapter 13 Bankruptcy Differ
Chapter 7 and Chapter 13 bankruptcy proceedings offer different approaches to getting relief from unmanageable debt.
Chapter 7 bankruptcy is a liquidation. Under its provisions, the individual’s assets are sold off to raise money to pay off debts. Certain property is exempted from liquidation, including a car used as primary means of transportation, as well as property subject to a valid lien. Having a lien on your car can shield it from liquidation. Chapter 7 also allows the debtor to write off, or “discharge,” certain kinds of unsecured debt.
Chapter 13 bankruptcy is a reorganization. It is also known as a wage earner’s plan because, under Chapter 13, people with steady income propose a plan to pay all or a portion of their debt over three to five years. But there is a limit on how much debt an individual can have and qualify to file a Chapter 13 bankruptcy.
What is a Lien?
A lien is a conditional legal right to property. A creditor who loans you a significant amount of money – such as for the purchase of a car or house – will require a lien against the property, which is an agreement that they may assume ownership if you default on payments. If you make payments as scheduled, a lien expires when the loan is paid and is nothing more than paperwork.
Institutions in the business of lending money want to be repaid. They don’t want to take possession of property. When they must, they sell it at auction, usually at a loss. And when that happens, the borrower is still responsible for the “deficiency value,” the difference between the sale price and what’s left on the loan.
But, if a lender couldn’t get payments out of the borrower when they had the car to drive, getting payments for a car that is long gone is going to be even tougher. At this point, many lenders sell such loans to companies that specialize in collecting bad debt, often through aggressive tactics.
The point is, you don’t want to default on a loan, and your lender doesn’t want you to, either. This is another reason not to delay seeking financial counseling if you realize you cannot make loan payments. Your creditors would rather work something out than repossess your car, home or other property. But eventually, it is too late.
How a Lien on Your Car Impacts Chapter 13 Bankruptcy
Debtors who earn a healthy income but who still need to file a bankruptcy case may be required to file under Chapter 13. In this scenario, they would devote their disposable monthly income to repaying their unsecured creditors. But the less disposable monthly income a debtor has, the less money they will be required to pay creditors in a Chapter 13 case.
Having a lien on a car loan (even a relatively new loan) ties up the amount of money required for the monthly payment. This reduces your disposable income, and thus your monthly payment to creditors in your Chapter 13 reorganization plan. In a few cases, it could mean you have too much debt for a Chapter 13 plan and force you into Chapter 7, in which you may be able to discharge debt instead of paying it back and keep the car.
This may or may not be a beneficial approach for you, but it is potentially an option that a bankruptcy lawyer from Sasser Law could help you explore. In some cases, it’s a matter of deciding whether you want your money to go to pay an old credit card bill or go to pay for a car you’re driving every day.
How a Lien on Your Car Impacts Chapter 7 Bankruptcy
In most Chapter 7 bankruptcy cases, the debtor’s car is exempt from liquidation if you can continue to make payments. If you cannot continue to pay for the car, Chapter 7 bankruptcy rules allow you to surrender the car and eliminate all of the debt owed for it, including any deficiency balance.
The Chapter 7 discharge wipes out your obligation to pay qualifying debts. This means the lender or creditor cannot later sue you to collect the debt and cannot garnish your wages or take money out of your bank account through a court-ordered lien.
However, a lien does not go away with discharge of the debt. A lien stays with the property, which means the lien holder’s right to repossess and sell the car remains in effect.
There are two ways to keep a car in a Chapter 7 bankruptcy case: reaffirm the loan or redeem the car.
To reaffirm the loan, you sign a new contract to pay the remainder of the loan. This requires you to demonstrate to the lender and the Bankruptcy Court that you are capable of making the payments.
To redeem the car, you finish paying for the car in a single, lump-sum payment. If the car is worth less than the outstanding balance on the loan, the car’s value is all you have to pay, and the rest of the loan is forgiven. If you pursue this route and you and the lien holder cannot agree on the car’s value, the Bankruptcy Court will decide.
Redeeming the car is a good option if there is a significant difference between the vehicle’s value and what you owe, assuming you can make the lump-sum payment. There are loans specifically for redemption transactions, or you may be able to work something out with family or a friend.
Determining the best approach for you requires a full examination of your financial situation. If you reside in North Carolina and are overwhelmed by debt, the bankruptcy attorneys at Sasser Law can work with you to help you decide the best way forward.
Contact Our Lawyers About Property Liens and Bankruptcy
At the Sasser Law Firm, we consider bankruptcy a tool for gaining a fresh start financially. We are committed to helping individuals and families make the best use of bankruptcy law, particularly when they face the potential loss of their belongings in a bankruptcy proceeding.
The board-certified bankruptcy lawyers of Sasser Law have more than 20 years of experience helping people navigate and overcome financial setbacks. Contact us today to set up a free consultation about how we can assist you.