Vail A. Kaufman, P.A.
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What happens to my car in bankruptcy?

The vehicle you drive is a very important part of your life. It takes you to and from work. It gets children to and from school or to their various activities. It gets you to and from any shopping you need to do. In suburban Maryland it is hard for most people consider life without their vehicle. It is an intricate part of everything.

But your financial world is closing in on you and you are thinking about bankruptcy as a possible option. What happens to your car? Obviously, everyone's situation is different but in my many years of assisting consumers through the process of bankruptcy I can say that only a very few people give up their vehicle and most of those are by choice.

If the car is financed the consumer is faced with three choices in a chapter 7 bankruptcy: surrender the vehicle, redeem the vehicle, or reaffirm the debt.

Surrender the Vehicle:  this option is self-explanatory. You turn the vehicle back to the creditor and regardless of the balance of the loan you will owe no more money.

Redeem the Vehicle:  under this option you buy the vehicle from the creditor for its present actual cash value. The balance on the loan does not matter. Any balance is discharged in the bankruptcy. I've actually never had a client who could choose this option. If a person had the cash to buy the car for its current value they likely would not be in my office to discuss bankruptcy.

Reaffirm the Debt:  under this option the debtor simply agrees to treat the vehicle and the loan as if the bankruptcy never happened. The consumer simply continues to make the regular contract payments on the vehicle. The consumer does face all the state law consequences of nonpayment if the consumer is unable to continue with the regular vehicle payments.

If the car is paid for the situation is obviously different but even here losing your vehicle to the bankruptcy is extremely rare. In bankruptcy all of your property is identified and valued. This includes any vehicles. But in bankruptcy you are permitted to exempt certain property from the bankruptcy and retain possession of that property. For the vast majority of consumer bankruptcy debtors their vehicles fit within these exemptions and are retained by the consumer.

In a Chapter 13 Bankruptcy, the choices for dealing with a vehicle are quite simple:
Continue to make the regular vehicle payments to the creditor outside of the bankruptcy plan or treat the vehicle and the creditor inside the bankruptcy. There are reasons to do one or the other.

Outside of the Bankruptcy Plan:  if the vehicle was purchased less than 2 ½ years before filing the bankruptcy, the vehicle is not heavily over financed and  the payments on the vehicle are up to date it may make the most sense to simply continue to make the regular contract payments to the vehicle creditor outside of the bankruptcy plan

Inside the Bankruptcy Plan: if the vehicle was purchased more than 2 ½ years before filing the bankruptcy, or if the amount owed on the vehicle is significantly more than the vehicle is worth or if the vehicle payments are behind then treating the vehicle and the loan on the vehicle inside the bankruptcy plan may be the better choice.

The bankruptcy law, bankruptcy judges and the trustees in bankruptcy all understand your need for a working vehicle in your life. You can't have the promised fresh start after a chapter 7 bankruptcy if you don't have a way to go to work. If you are in a chapter 13 bankruptcy you cannot maintain your regular household budget expenses and a chapter 13 plan payment without the ability to get to work. With rare exception your vehicle is safe in bankruptcy.

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Vail A. Kaufman, P.A.
8955 Edmonston Road
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Greenbelt, MD 20770

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