Wednesday, July 8, 2009

Real Life, Real Bankruptcy: Can I Keep My Car?

It's a question I get all the time: "Can I keep my car if I file bankruptcy?"

That answer is a definite "Maybe."

The good news is that in most cases, in Oklahoma where I practice, most debtors have sufficient exemptions to cover their vehicles. In other words, they don't have to worry about the bankruptcy trustee being able to seize and sell their cars for the benefit of their creditors.

Let's back up a bit.

Chapter 7 bankruptcy is known as a "Liquidation Bankruptcy" because theoretically the debtors' property can be seized and sold to satisfy their debts. Certain property is exempt from this liquidation process, however. This is because bankruptcy has a public policy purpose of giving honest debtors (people who owe money) a chance at a "fresh start", i.e. by wiping away their unsecured debts.

For example, in Oklahoma you have an exemption for your home, your clothing, and your furniture. A person couldn't very well make a "fresh start" without clothes on their back, and a roof over their head, and furniture to sleep on. Similarly, Oklahoma law allows each debtor (husband and wife) to exempt an automobile that is worth up to $7,500 each, or $15,000 together. You gotta have transportation, after all.

But that's not the end of the story.

In bankruptcy, you have three -- count 'em, (uno, dos, tres) THREE -- options with secured property (property which is collateral for a debt, like your car): Abandon, Redeem, or Reaffirm.

To heck with the cheese, get me outta this trap!

Let's say you've got a car note, and the new-car-smell and a slick salesman talked you into buying some real genuine faux woodgrain plastic trim, and Corinthian leather seating and a 500 CD changer that you just can't afford. (Never happens, I know, but humor me.) Under bankruptcy law you have the right to abandon or surrender the collateral (in this case, the car) back to the creditor and discharge any remaining obligation to pay the note. It's a quick and relatively painless way to get out from under a car note which is "upside-down", i.e., on which you owe more than the car is worth. But what if you want to keep it?

Let's Make a Deal: Redemption and Reaffirmation

But there are two more options, other than simply abandoning the property back to the creditor. You may also choose to either redeem the property for its fair market value, or reaffirm that property by entering into a negotiated contract with the creditor to keep paying for the collateral.

Pursuant to your redemption rights under 11 U.S.C. 722, you can offer a lump sum payment to the creditor for what the car is actually worth -- as opposed to what you owe on it. This is done by motion, and requires a court order to accomplish. Nonetheless, this could be a good deal if the property has a fair market value that is substantially less than what is owed, AND you have the ability to find a lump sum to offer to the creditors. (For obvious reasons, this is not often possible when the value of the automobile is thousands of dollars. Works great with consumer items like furniture and appliances.)

Reaffirmation (see 11 USC 524(c)(3)) is a binding contract that survives the bankruptcy discharge. It is voluntarily entered into by the debtor and creditor, and it must be approved by the court in some circumstances. Theoretically, they are negotiated anew with new terms for payment, interest rate, term, etc. When a debtor reaffirms a debt, they agree to relinquish their right to a discharge of that debt, and in return keep the collateral (car, etc.) that serves as security for the note or obligation. Because of this "waiver" of their discharge rights, courts are increasingly looking on reaffirmation agreements with a jaundiced eye -- after all, why bother filing bankruptcy if you're going to emerge on the other side with the same debts you had going in to the process? An approved reaffirmation agreement will allow the debtors to continue enjoying that new-car-smell -- for a price.

Yes, No, and Maybe

And that leads us directly to the "Maybe".

Since the courts are increasingly disinclined to approve reaffirmation agreements, there are some big hoops to jump through if a debtor wants to enter into one of these agreements. First and foremost, they must prove to their attorney and to the court that the reaffirmation agreement is in their best interest. This is more difficult than it may seem -- especially so if the car payment is way outta whack (a technical term of art I favor) with the debtor's budget. Let's face it -- if you're making $25,000 a year, you've got no business with a $300 car payment.

Part of that decision necessarily involves whether or not your budget and future income will allow you to pay for the car. If your bankruptcy Schedule I (Income) and your bankruptcy Schedule J (Expenses) don't show sufficient excess income to cover the car payment, prepare to say goodbye to those Corinthian leather seats and that 500 CD changer installed in the trunk, or that $18,000 Harley you bought for Mother's Day. It ain't gonna happen, Bro.

If you are facing financial difficulties and having trouble paying your bills, give me a call. I've been there, done that, and can help you. Whether it's bankruptcy or defense of a lawsuit, I can let you know what the options are. As I often say, I know where the rocks are in this particular river. Let me be your river guide.

Call me at 918 409-2462 or write to me at for free consultation.

Weasel Words (aka disclaimer): this is not legal advice, this is a general information blog post on the internet. (And if it's on the internet, it's gotta be true, right? Uh ... no.) If you haven't paid me a retainer, you are not (yet) my client and should not rely on any of this information to make any decisions. The law is complicated. The facts even more so. If I could have learned the law by reading blogs, I'd ask for money back from those three plus years of hell I paid for in law school.

Member, National Association of Consumer Bankruptcy Attorneys