What Happens to a Car in Chapter 7 Bankruptcy?
Before getting started, nothing here is legal advice, nor should this post be mistake for legal advice. Every situation is different. Talk to a qualified bankruptcy attorney to understand how all this could apply to you. Again, nothing here creates an attorney-client relationship.
When filing for Chapter 7 bankruptcy, deciding the fate of your vehicle is one of the most important choices you’ll face. A car is often essential for daily responsibilities like commuting to work, taking children to school, and running errands. Thankfully, Chapter 7 bankruptcy provides multiple options for handling your car loan: surrendering, redeeming, reaffirming, or using the retain-and-pay approach. In this post, we will talk about each of these options.
In Washington State, the Revised Code of Washington (RCW) 6.15.010 outlines exemptions that protect a debtor’s equity in personal property, including vehicles. These exemptions are a key factor in determining whether you can retain your car and under what conditions.
This guide will explain the available options, how Washington’s exemptions apply to each, and how Spalding Law Firm PLLC can help you make the best decision for your situation.
Note: it’s generally a good idea to know what you’d like to do before your attorney files your bankruptcy petition. For instance, if you intend to redeem your car, but ultimately cannot get a redemption loan, you’re going to have to amend your Statement of Intention to either surrender, reaffirmation or retain and pay. Since there’s a 30-day limit* to amend as of the filing date, you want to know as soon as possible whether redemption is even possible, or whether the terms of the reaffirmation are acceptable. Don’t forget this.
*either 30 days from the date of the filing, or before the Meeting of Creditors, whichever comes first. See below for more.
Here’s how the process works with a car:
The Role of the Statement of Intention
Under 11 U.S.C. § 521(a)(2), Chapter 7 bankruptcy filers must file a Statement of Intention. This informs the court, Chapter 7 trustee, the United States Trustee, and creditors how a debtor plans to handle property secured by loans, such as car loans. This document must be filed within 30 days of filing the bankruptcy petition or by the date of the first Meeting of Creditors (341 meeting), whichever is earlier.
After filing the Statement of Intention, you must perform your stated intention within 30 days of the Meeting of Creditors. For example, if you intend to redeem the car, you need to complete the redemption process within that timeframe. Similarly, if you plan to surrender the car, the lender will take possession without requiring further action on your part. This happens in one of two ways: either the creditor waits until the case is over to take the car, or they file for relief from the automatic stay in order to take the car. The first of these options usually makes the most sense for the creditor.
Let’s pretend that the guy on the right is about to repo this car.
Creditors sometimes attend the Meeting of Creditors to ask about the vehicle’s condition, insurance coverage, and storage. These questions ensure their collateral is protected until possession is transferred. If you fail to file the Statement of Intention on time or perform your stated intention, the automatic stay protecting you from repossession will terminate, and the lender may take legal action to recover the vehicle.
Exemptions and Equity in Your Car
In Washington State, RCW 6.15.010 provides exemptions for a debtor’s interest in personal property, including vehicles. As of 2024, the motor vehicle exemption is up to $15,000 in equity. Equity is the difference between your car’s current market value and the amount you owe on it. This information is current as of December 6, 2024.
• If the equity is less than $15,000, the car is fully protected, and you can retain it by reaffirming the loan, redeeming it, or continuing payments through the retain-and-pay approach.
• If the equity exceeds $15,000, the bankruptcy trustee may sell the car, provide you with the exempted amount, and use the remainder to pay creditors.
Understanding how exemptions apply to your car is crucial for determining which option is best for you. Hence, another reason you want a good bankruptcy attorney.
A really good bankruptcy attorney.
Option 1: Surrender the Vehicle
Surrendering a vehicle involves voluntarily “returning it” to the lender. This option is often chosen when the loan balance exceeds the car’s value or when keeping the vehicle is no longer practical. After the vehicle is surrendered, the loan balance is discharged in the bankruptcy.
Exemptions and Surrender
If a car’s equity exceeds Washington’s $15,000 exemption, surrendering may be advantageous. By doing so, a debtor avoids the risk of the trustee selling the car and can start fresh without the financial burden of the loan. Of course, we all need something to drive.
Pros of Surrendering
Debt elimination: A debtor is relieved of any remaining balance on the loan, even if the car is worth less than what is owed.
Replacement Loans
If a debtor surrenders a car, finding reliable transportation is a priority. At Spalding Law Firm PLLC, we partner with lenders offering replacement loans tailored for bankruptcy filers. These loans can help secure a vehicle with manageable terms, even after filing a petition for Chapter 7 bankruptcy.
Option 2: Redemption
Redemption allows a debtor to keep their car by paying the lender the current market value of the vehicle, regardless of the remaining loan balance. This option is ideal when the car’s value is significantly lower than the loan balance, a situation often referred to as being “upside down” on the loan.
Exemptions and Redemption
If a car’s equity is fully exempt (i.e., under $15,000), redemption is a viable way to retain the vehicle without risk of the trustee selling it. However, if the equity exceeds the exemption, a debtor may need to account for the nonexempt portion.
How Redemption Works
To redeem a car, a debtor you must pay its market value in a single lump sum. Once this payment is made, the remaining loan balance is discharged, and the car is no longer subject to the lender’s lien. Keep reading.
Redemption Loans
Many bankruptcy filers lack the funds to pay a lump sum out of pocket. In these cases, a redemption loan can provide the necessary financing. At Spalding Law Firm PLLC, we work with trusted lenders who specialize in redemption loans, offering reasonable rates and flexible terms to bankruptcy clients.
Pros of Redemption
• Significant savings: If the car’s market value is much lower than the loan balance, redemption can save a debtor thousands of dollars.
Cons of Redemption
• Upfront cost: Redemption requires a lump-sum payment, which may be impossible without financing.
• Loan limitations: Vehicles with high mileage or poor condition probably won’t qualify for redemption loans.
Option 3: Reaffirmation
Reaffirming a car loan means a debtor agrees to continue making payments under the existing loan terms, even after your bankruptcy discharge. By reaffirming, a debtor removes the car loan from the bankruptcy estate, and the debt is not discharged.
Negotiating Reaffirmation Terms
If a debtor’s car is “upside down,” then the debtor can often negotiate with the lender to adjust the loan balance or interest rate. This process is useful with the assistance of an experienced attorney to negotiate better terms on the debtor’s behalf.
Pros of Reaffirmation
• Keep the car: Reaffirming allows a debtor to retain their vehicle without interruption.
• Credit rebuilding: Continued on-time payments can help improve a debtor’s credit score after bankruptcy.
Cons of Reaffirmation
• Continued liability: If a debtor falls behind on payments later, the lender can repossess the car and hold the debtor responsible for any remaining balance.
Option 4: Retain and Pay Option
The retain-and-pay option allows a debtor to keep their car without signing a reaffirmation agreement. A debtor simply continues making payments under the original loan terms. This option requires the court to issue a Moustafi Order, named after In re Moustafi, 371 B.R. 434 (Bankr. D. Ariz. 2007), which clarified that debtors could retain vehicles and pay the loan without reaffirmation.
Exemptions and Retain and Pay
This option is most effective for vehicles with equity under Washington’s $15,000 exemption, as the trustee cannot sell them.
Pros
• Flexibility: a debtor keeps their car without committing to a reaffirmation agreement.
• Risk mitigation: If the car becomes unaffordable or is wrecked, a debtor can surrender it without being responsible for a deficiency.
Cons
• Court approval required: A Moustafi Order is needed, which may complicate the process. Not all judges are anti-reaffirmation enough to issue these orders.
5. Choosing the Best Option
A debtor’s car equity, loan balance, and personal financial goals determine the best approach for handling their vehicle in Chapter 7 bankruptcy.
Working with Spalding Law Firm PLLC
At Spalding Law Firm PLLC, we specialize in helping bankruptcy clients protect their vehicles and navigate Washington State’s exemption laws. Whether you’re considering surrender, redemption, reaffirmation, or retain-and-pay, we’ll guide you through every step. We also partner with top lenders to provide competitive rates for redemption and replacement loans.
Contact Spalding Law Firm PLLC today to protect your transportation and financial future.
