Can I keep my car after filing for bankruptcy?

Posted By Garrett Law LLC || 11-May-2015

Yes. Bankruptcy is designed to allow you to keep your vehicle – even if you are behind on payments.

In Kansas, a person filing for bankruptcy can keep one vehicle for daily use. The vehicle is “exempt property.” If a couple files for bankruptcy, they can each keep a vehicle. If you have more than one vehicle each, your bankruptcy lawyer can give you options on what to do.

A loan on a vehicle is a secured debt. Normally, if you owe money and do not make the payments, the creditor can repossess the vehicle. However, when you file for bankruptcy, the automatic stay prevents the creditor from possessing, even if you are behind. We commonly file cases within a few business days in order to beat the repo man.

Your Options Through Bankruptcy

When you file for bankruptcy, you have a choice with your car payment. You can surrender the vehicle and owe nothing, or you can keep the vehicle and pay for it. The option is yours.

If you surrender the collateral, the bank sells the property and applies the proceeds against the note. The Bankruptcy Code treats the remaining balance (if any) as a dischargeable debt, treated in the same manner as a credit card – it goes away once you receive your discharge. With very limited exceptions, you do not need to pay the remaining balance. If you are saddled with driving a lemon securing an “upside down” loan, this is your chance to get rid of that whole problem. If you decide to keep the vehicle, the chapter in which you file matters.

Chapter 7 vs. Chapter 13

In a Chapter 7, the terms of the note remain unchanged. If you keep the vehicle, you pay at the contract interest rate, and make the required contract payments. In addition, you sign an agreement, called a reaffirmation, making yourself personally liable for the debt, even after your discharge. This effectively removes the car note from the bankruptcy. Chapter 7 is a “take it or leave it” proposition when it comes to car payments.

In a Chapter 13, you can change the terms of the note. The Plan changes the interest rate on the note to the “Till” or “discount” rate. The Court assigns this standard rate to all secured claims in a Chapter 13. As of May 2015 in Kansas, the current rate is 4.75%. This is usually (but not always) lower than your loan agreement. A lower rate means more money goes to principal, and the Plan pays the note down much more efficiently.

In addition, if you purchase the vehicle more than 910 days before filing, or if the debt is a payday or title loan, you may be able to pay the value of the car, rather than the balance of the contract. This is only available in a Chapter 13 Plan. For instance, if you owe $9,500 on your 2006 Kia Sodona, and are paying at 18%, the Plan can amend the contract to pay the $4,600 the vehicle is worth, at 4.75%. This “cram down”, combined with the interest rate deduction, can greatly benefit your budget, lower your payments, and put money in your pocket from the outset.

Either way, you are able to take control of your financial life. Our Topeka bankruptcy lawyer at Garrett Law LLC wants to help. Contact us online or by phone today to learn how we can help you keep your property and rebuild your life.

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