I frequently hear clients say things like, “I don’t want to file bankruptcy on my car.”
You “file on” all debts, but you need to understand what that means.
As I tell clients, you must list all your debts when you file bankruptcy under any Chapter of the Bankruptcy Code. That does not, however, mean that because you file bankruptcy you must give up your car, home, or other collateral for debts.
When you file a Chapter 7 bankruptcy, you list your vehicle as personal property on Schedule B. You also list it in your Statement of Intention. On that form, you state whether you want to surrender the vehicle or retain the vehicle. (We could digress here about “reaffirmation agreements,” but this post isn’t about that topic. For information on that topic, you can read my posts on reaffirmation agreements. Parts one through four are relevant for vehicle issues.)
Suffice it to say that with Chapter 7, you simply say “I’m keeping it” or “I’m surrendering it.” But understand you will “file on” the debt even if you fully intend to retain the vehicle and continue paying on it.
In Chapter 13, you list the vehicle the exact same way as you would in Chapter 7. However, in Chapter 13, you have more options. You can “treat” the secured debt by surrendering the vehicle or retaining the vehicle in your Chapter 13 plan. More importantly, you can do two other things:
- You can pay only the value of the vehicle as the secured claim, rather than the amount you owe the creditor. For example. If you owe Ally Financial $20,000, but your vehicle is only worth $15,000, your Chapter 13 plan can propose to pay Ally $15,000 with interest, rather than the $20,000. (Your ability to do this is limited by the so-called 910-day rule, meaning if you borrowed money from the lender to purchase the vehicle for your use within about 2.5 years of filing bankruptcy, you cannot “value” the claim in this manner.) If you obtained the loan in a refinance transaction (such as with a title loan), this limitation doesn’t apply. As with many things in bankruptcy, timing can be very important.
- You may propose to pay the lender a reduced interest rate of 5.25%, rather than the contract rate. And you can impose this treatment on the lender even if you obtained the loan within the 910-day period. (As to why the rate is 5.25% is a bit of a long story, and I’ll reserve that for another post. Moreover, this post is only directed at South Carolina bankruptcy filers. The 5.25% rate may not apply if you’re filing in another bankruptcy district. Your rate could be higher or lower.)
The “take away” from this post is this: If you file bankruptcy, you must “file on” all your debts, including debts secured by things you may want to keep like cars. And “filing on” doesn’t mean you must give up your vehicle.