Losing Your Car in Bankruptcy
Probably the most common question people in Cleveland ask me about bankruptcy is, “Will I lose my car if I file for bankruptcy?” The answer is, with the help of an experienced attorney, almost certainly not. However, below are some situations where you will lose your car (or may lose it if your case isn’t handled properly but the right attorney).
Reasons Why You Might Lose Your Car in Bankruptcy
1. You have too much automobile equity
If you have a paid off car or put a large down payment on a car you’re still paying on, you may have too much automobile equity to keep your car in bankruptcy. Automobile equity is defined as the value of your vehicle minus what you owe on it. For instance, if you have a car with a blue book value of $10,000 and you still owe $7,000 on it, you have $3,000 in automobile equity.
Ohio law allows each person filing bankruptcy to keep up to $3,450 in automobile equity in one vehicle and one vehicle only. In addition, in some cases the number can be increased to about $4,600 total. If a husband and wife file together, it is sometimes possible to double these numbers, but if you have a paid off car worth $10,000 there is no way to keep that car in a Chapter 7 bankruptcy. The bankruptcy trustee will seize your vehicle and sell it for the benefit of your creditors.
It is sometimes possible to engage in something called “pre-bankruptcy planning” in order to allow you to get some of the benefit of your vehicle and still file bankruptcy.
However, pre-bankruptcy planning is very, very delicate and requires a great deal of attention from an attorney to do right. Attempting to do your own pre-bankruptcy planning often triggers action against you to block your bankruptcy and/or seize property you transferred out of your name prior to filing.
2. An auto finance company refuses to work with you
Most car finance companies allow you to do something called “retain and pay,” which is where you continue paying your car, the payments are applied to your balance, and when the balance is paid off you get the title. The creditor likes this arrangement because they still get paid and you like this arrangement because you get to keep your car.
However, at my office I have a list of auto financing companies that refuse to do retain and pay. These are companies that want a reputation for being tough in bankruptcy court and use that reputation to get you to sign something called a reaffirmation agreement.
A reaffirmation agreement is a new contract that undoes the bankruptcy with respect to the vehicle and allows the financing company to go after you for money if you stop paying on the car. The court is suspicious of reaffirmation agreements because they often result in people getting garnished after the bankruptcy if they were unable to pay on their car and it got repossessed. Because you can only file Chapter 7 bankruptcy once every 8 years, this can leave debtors in a very difficult position.
If you’re filing bankruptcy and have one of these “tough” car financing companies, we will work with you to try to get a reaffirmation agreement signed so you can keep your car.
However, judges will not approve reaffirmation agreements in a lot of cases because the monthly payment is too high and you cannot actually afford the payment without skipping other kinds of payments like rent and utilities. If this is the situation, your only two options are going to be to give up the car or give up on filing bankruptcy.
3. You failed to claim the right exemptions
Ohio Revised Code section 2329.66 lists “exemptions” or rules that allow debtors to keep certain kinds and amounts of property in a Chapter 7 bankruptcy. As mentioned in #2 above, depending on your case, you can exempt up to $4,600 in automobile equity by listing the proper exemptions in Schedule C of your bankruptcy petition.
However, if you fail to list the proper exemptions then the bankruptcy trustee is going to seize your vehicle and sell it at auction. Remember, the bankruptcy trustee is not your friend (see this article). He or she is a bill collector who gets paid a commission for anything they take from you, so when you go into bankruptcy court with bankruptcy papers that aren’t filled outright they are going to enrich themselves by impoverishing you.
4. Car purchased in 90-day period prior to bankruptcy
When you purchase a car on credit the financing company has to file paperwork with the state of Ohio to record their lien, which is what gives them the right to repossess your car if you don’t pay.
If the car was purchased within 90 days of the date you filed bankruptcy then the lien needs to have been recorded within 30 days of when you purchased the car. If it was recorded even one day late the bankruptcy trustee will “strip the lien” off the car, meaning you now have a paid-off car.
If that sounds like good news to you, it isn’t, because there is something you’re not considering: You’re usually not allowed to keep a paid-off car in bankruptcy (see #1). The bankruptcy trustee is going to seize your car, sell it at auction, and distribute the proceeds to your creditors.
