One of the most frequent questions I get when first speaking with potential clients who are thinking of filing for bankruptcy in Colorado Springs is “If I file for bankruptcy, will they take my car?” I usually answer with a question of my own: “Do you want to keep your car?” Then I go through the four basic options for dealing with vehicles in a Chapter 7 bankruptcy:
- Surrender it – Give it back to the lender;
- Reaffirm it – Keep paying the lender for it;
- Redeem it – Buy it from the lender; or
- Exempt it – If it’s value is low you may get to keep it.
Here’s how each of the options works:
Surrender the car: If you’re sick of making payments on the car and you can live without it, you may want to consider just “giving it back” to the lender. The lender will then sell it for whatever they can get, but you won’t have to worry about owing them the “deficiency” – that will be discharged in your bankruptcy case.
Reaffirm the car: With this option, you keep the car and agree to continue paying for it pretty much just as you did before you filed for bankruptcy. You may be able to get the lender to reduce the interest rate or the balance owed, but that’s not a sure thing. The good news is that you get to keep your car. The bad news is that, if in the future you are unable to make the payments, the lender can take the car away from you and you will be stuck owing the “deficiency” – the difference between what you owed and the amount the lender ultimately sells the car for, plus the lender’s costs in getting the car back from you and getting it sold. For this reason, many bankruptcy lawyers recommend that their clients not reaffirm their auto loans.
Redeem the car: This is a viable option if you owe a lot more on the car than it’s worth. When you redeem the car, you pay the lender the value of the car in a lump sum payment. Any amount owed over and above the value of the car is discharged in your bankruptcy case.
The most common question I hear about redeeming a car is: “Where will I get the money to pay the lender the value of the car?” Well, believe it or not, there are companies that are in the business of lending money to people in bankruptcy so that they can redeem their cars. The biggest company is 722Redemption.com. They will typically conduct an analysis for the car owner to make sure that they will be getting a better deal by redeeming the car rather than reaffirming it.
Exempt the car: Under Colorado law, Colorado Revised Statutes § 13-54-102 (j), you are allowed to “exempt” your motor vehicles up to $5,000 in value. So, if you own your vehicle free and clear and it is worth $5,000 or less, no problem. You get to keep it. This exemption also applies to the equity you may have in your vehicle: Say your car is worth $10,000 and you owe $6,000 on it. No problem. Since your equity is $4,000, which is less than $5,000, you get to keep your car!
Under Chapter 13, you have even more options. You can surrender the car. You can continue to make the payments, like a reaffirmation. You may be able to “cram down” the vehicle by requiring the lender to accept payments based upon the car’s value at a lower (5.5%) interest rate. And, even if the value or your equity in the car is more than $5,000, you still may be able to keep it, as long as you pay at least as much through your Chapter 13 plan as the unsecured creditors would have received if you had filed a Chapter 7.
Everybody’s situation is different. If you would like to discuss your car(s) with me, feel free to give me a call at 719 227-8787.