If you are considering filing for bankruptcy, there are a number of factors to consider if you own a car and you want to keep it. How much you car is worth, and if you still owe money on the car, will determine if you are able to retain possession of your car while in the midst of a bankruptcy.

Different Kinds of Bankruptcy Relief

Before we specifically discuss your car, let’s ensure you understand bankruptcy. Bankruptcy is a legal proceeding that helps debtors become free of debts they have gotten behind on while still allowing creditors to be repaid. It’s a federal proceeding, and as such, the rules are found in the US Bankruptcy Code.

While bankruptcy allows you to start fresh, it will make it harder for you to get credit in the future, and it remains on your credit report for several years. There are several kinds of bankruptcy. Their US Bankruptcy Code chapter number typically refers to each type.

A federal bankruptcy judge hears all bankruptcy cases in the US in federal court. The judge decides whether the person is eligible to file bankruptcy and whether they should receive relief under the Bankruptcy Code. A trustee appointed by the United States Trustee Program of the Department of Justice oversees the administration of bankruptcy cases. The trustee represents the individual’s estate in the bankruptcy case, and the individual has minimal contact with the judge unless a creditor objects to some portion of the proceedings.

Chapter 7 and Chapter 13 are the most commonly filed forms of bankruptcy for individuals. Let’s look at each of them to understand them better before you decide to file bankruptcy.

 

Chapter 7

This form of bankruptcy allows individuals to get rid of unsecured debts like medical or credit card bills. People who have nonexempt assets like second homes, stocks, bonds, and high-value collections must sell those assets to repay the unsecured debts. However, those with no assets or only exempt property like tools for work, a personal vehicle valued at a specific amount, household goods, and clothing may not repay the unsecured debts.

 

Chapter 13

Sometimes people earn too much to qualify for a Chapter 7 bankruptcy. In that case, they could file under Chapter 13, which is sometimes called a wage earner’s plan. A Chapter 13 bankruptcy allows people to create debt repayment plans that work for them and their creditors. These plans typically are repaid in installments over the course of three to five years, and the individual is allowed to keep their property in exchange for repaying their debts.

 

Exemptions During a Chapter 7 Bankruptcy in Georgia

When you file for Chapter 7 bankruptcy, the state of Georgia allows a $5,000 car exemption. This means that if you have less than $5,000 of equity in your car, you will be able to keep it. In addition, Georgia allows a wild card exemption of up to $5,000. The wild card exemption covers any of your property up to $5,000. If you haven’t used it yet, you can put your wild card exemption towards your car equity.

If your car is worth more than $10,000 in the state of Georgia and you have exhausted all of your exemptions, the trustee of your bankruptcy can sell your car, pay you the amount of your exemptions, and use the remainder to pay back creditors.

If you are filing for bankruptcy jointly with a spouse, you can add together your $5,000 car exemptions, totaling $10,000 in car exemptions alone.

 

Redeeming Your Car

One way to keep your car when you file for Chapter 7 bankruptcy is through redemption. You pay the difference between your exemptions and the remaining replacement value to your lender in redemption. Doing this means you would own your car outright and be able to keep it. However, not many people filing for bankruptcy can find the kind of cash it would take to redeem a car, so less than 2% of petitioners go with redemption.

 

Reaffirming Your Car Loan

Once your bankruptcy is completed, your lender may require that you reaffirm your car loan. This is because once your bankruptcy is finished, your original car loan will be wiped out and you won’t be responsible for making payments. Most car lenders require this loan reaffirmation, and it is one way the lender is protected if you default on the loan once again.

Those who file Chapter 7 must indicate they plan to reaffirm their car loan on the statement of intent form (Form 108). Your lender has to agree to reaffirmation as does the judge. Depending on the circumstance, a lender who agrees to a reaffirmation plan will send an agreement to either your attorney or the judge. Your attorney must approve your plan for reaffirmation.

If you should default on the loan again, another Chapter 7 filing won’t be an option for you. You cannot file Chapter 7 again for eight years following the discharge of a Chapter 7 filing.

Even when your car is worth more than the exemptions you are entitled to, the trustee may decide not to sell your car so that you can continue to go to work and fulfill your obligations.

 

What About Chapter 13?

Now that you have a basic understanding of how Chapter 7 bankruptcy works in regards to keeping your car let’s talk about Chapter 13. Chapter 13 is often a better option if you want to keep your vehicle. In Chapter 13, a repayment plan is created to help you repay outstanding debts. Unsecured debts are discharged if you complete the plan successfully.

Chapter 13 is a good option if you have a fair amount of equity in your car. The equity will be considered part of the foundation that determines your payment plan. If you’re behind on your car payments, a plan to catch them up will be included in your Chapter 13 plan.

Assets aren’t liquidated in Chapter 13. Instead, they become the basis of the calculations for your ability to pay. The value of your car is determined by the same method as that for Chapter 7. This is because creditors must receive the same amount for a debt in a Chapter 13 filing as they would in a Chapter 7 filing.

The bankruptcy court can make changes to your loan terms if you’ve owned your car for more than 910 days (that’s about 2 ½ years). The court can have your interest rate lowered. They can also rule that what you owe is what the car is worth now instead of what you originally paid for it. Lenders have to agree to whatever terms the court sets for repayment.

If you are worried about your car or other possessions as you are considering filing for bankruptcy, it’s time to sit down with a qualified bankruptcy attorney who can walk you through the process.

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