Vehicles and Bankruptcy

Many debtors contemplating filing for bankruptcy own a vehicle, whether owned out right or there is an existing car loan. There are a number of issues surrounding vehicles and filing for bankruptcy, but not to worry, an experienced attorney can navigate these issues and explain your options. The issues vary between Chapter 7 and Chapter 13 Bankruptcy, so I will give a brief overview of both.

The first issue, in either case, is that a debtor is entitled to keep up to $3,000 in equity in one vehicle. Equity can be explained as the amount of your interest not subject to a loan or secured claim. If you own a vehicle with no loan the equity is the value of the vehicle. If you own a car with a loan the equity is the difference between the amount the car is worth and what is owed on the vehicle. If you have too much equity in a vehicle you can pay this amount back to the trustee. Discuss this with your attorney, and he/she can advise you on the best course of action.

If you are behind on car payments, and intend to keep the vehicle, you will probably need to consider filing a Chapter 13 bankruptcy. If you are not current on car payments your car creditor can file a motion for relief, basically asking permission of the court to lift the automatic say and allow repossession of the vehicle. If you are behind on your payments in a Chapter 7 this motion will be granted. In a Chapter 13 the past due amount will be addressed by the repayment plan filed with the court.

When filing under either Chapter it is imperative to list your intention for the vehicle, whether it is to be surrendered or retained. If you choose to retain the vehicle you must list whether you intend to reaffirm or redeem the debt. Failure to comply with this requirement may have adverse effects, as recently in In re Mollison, 463 B.R 169 (Bankr. D. Mass 2012) a court held that a creditor could not be sanctioned for attempting to perfect a lien post petition because the statement of intent was not filed out property, thus ending the automatic stay 30 days after the 341 hearing, and meaning there was no violation of the automatic stay. The court also found that the trustee may still be able to avoid the lien. There are a few things to consider in light of this ruling. First, if the intent is not filed out the protection of the automatic stay ends prematurely potentially creating a number of unwanted consequences for the debtor. Further, in this case, the debtor listed the car as retained, but did not specify how he intended to retain the vehicle. Because the lien was not properly perfected pre-petition, and the court held that the trustee can challenge perfection of the lien, the debtor may lose the vehicle. If the lien is not perfected and the value of the vehicle is over the exemption amount the vehicle may become property of the bankruptcy estate to be distributed among creditors. It is imperative that both debtors and attorneys ensure compliance with the bankruptcy rules to avoid such consequences.

If you have questions about this, or would like to schedule a free consultation, contact a St. Louis Bankruptcy Attorney Today.