By: Justin M. Kincheloe, Esq.
I hear this question often from clients who are about to file for bankruptcy. In most cases, the debtor is able to keep his or her vehicle. However, the answer to this question depends on a number of factors. If the vehicle has been paid off, then the debtor is able to keep his or her vehicle so long as it can be exempted. Exemptions are laws used to protect a bankruptcy debtor’s property from being liquidated in the bankruptcy proceedings. Exemptions have dollar limits depending on the type of property they are being used to protect. In California, the motor vehicle exemption and sometimes the “Wild Card” exemption allow bankruptcy debtors to keep their vehicles in a vast majority of cases. However, if the debtor’s vehicle is worth more than he or she can protect under applicable exemption laws, then the debtor will be in jeopardy of having the vehicle liquidated (sold) by the bankruptcy trustee.
If the vehicle has not been paid off, then the debtor must continue making all payments to the lender if he or she wishes to keep the vehicle. After the bankruptcy is filed, most lenders will require the debtor to sign a reaffirmation agreement. A reaffirmation is basically an agreement to exclude the auto loan from the debtor’s bankruptcy. Thus, once a reaffirmation agreement is signed, filed, and approved by the court, the lender will retain all of its rights with respect to the vehicle and may repossess the vehicle if the debtor subsequently falls behind on payments. The lender would also be entitled to recover any deficiency amount from the debtor if the vehicle is sold at auction for an amount less than the total amount owed on the note. This is why a debtor must give reaffirmation some thought. If the debtor has an unfavorable auto loan with a high interest rate or is far behind on payments, it is probably a better idea to surrender the vehicle. It is highly recommended that a debtor seek the advice of an attorney if being asked to sign a reaffirmation agreement.
There is also the rare case of redemption. Redeeming a vehicle in bankruptcy means that the debtor pays the fair market value of the vehicle to the lender in one lump sum payment. The vehicle is then treated as being completely paid off and any remaining amount owing on the loan is discharged in the bankruptcy. Redemption requires the debtor to file a motion with the court to determine the appropriate value of the vehicle.
It is always a good idea to consult with a knowledgeable attorney when filing bankruptcy. For more information about any Bankruptcy related issues, you should contact our experienced attorneys at Thompson Steinberg.
Justin M. Kincheloe, Esq.
P: 951-359-1209 x202
Justin Kincheloe is a partner and co-founder at Thompson Steinberg. He is licensed to practice in California and has been practicing consumer bankruptcy law for over three years. Mr. Kincheloe was born and raised in Des Moines, Iowa before moving to California. He strongly objects to the smell of musky colognes.
**The information presented here is general in nature and is not intended, nor should be construed, as legal advice for a particular case. This blog posting does not create any attorney-client relationship with the author. For specific advice about your particular situation, please consult with your own attorney.**