Bankruptcy - Keeping your House and Car
The bankruptcy process is very challenging.
One of the biggest questions that people face when considering filing for bankruptcy is whether or not they will be able to keep their house or car as a result of the bankruptcy filing. Surprisingly for most people the answer is yes.
As with many legal problems there are rules that need to be followed, but in 95% of the cases most people who file bankruptcy can keep both their house and car after filing bankruptcy.
In order to explain how this works we have to talk about few bankruptcy concepts:
For most people there are two kinds of bankruptcy. Chapter 7 bankruptcy and Chapter 13 bankruptcy.
Chapter 7 bankruptcy is the classic kind of bankruptcy where you file a case and all the debts that you owe are discharged leading to a fresh financial start.
Chapter 13 Bankruptcy is a repayment plan. People file a Chapter 13 bankruptcy to protect an asset such as a house or a car or because they earn too much money according to bankruptcy law.
The mechanics of a bankruptcy case are pretty simple. you file a bankruptcy petition with the court stating all of your assets and all of your debt. Once the case is filed, a bankruptcy trustee is appointed to protect the interests of the creditors. Your assets become part of the bankruptcy estate, meaning the court now owns everything you do, but in trust for you. More importantly, everything you own is protected from your creditors. While the case is pending, no one can do anything to bother you or take your property. They can’t call you. They can’t send you letters. They can’t sue you. They can’t garnish your wages. They can’t get into your bank account.
So, filing bankruptcy is like putting all your “stuff” in a big box. The box protects everything you own from being taken by anyone else.
Under bankruptcy law you are allowed to keep property that is in the bankruptcy estate. Your ability to keep this property is called “exemptions”. One of the most important exemptions you have, is called the homestead exemption. The homestead exemption allows you to keep all or part of your home.
You also have a motor vehicle exemption, which allows you to keep all or part of your automobile.
Finally, there is a “wildcard” exemption. You can put the wildcard exemption on any property that you have. Using these exemptions in combination allows you to keep your house, your car and most of your other property.
Exemptions allow you to take things out of the bankruptcy box. They are a very important tool in letting you keep your house and car throughout the bankruptcy.
Every State has a different exemption law. Your ability to keep your property is highly dependent on the laws of State and the rules of your bankruptcy jurisdiction. Please seek the guidance of a competent bankruptcy attorney if you want to know the specific bankruptcy exemptions allowed in your state.
Another concept we look at in bankruptcy court is equity. Equity is the difference between what your property is worth and what you owe on it. For example, if your house is worth $200,000 and your loan balance is $100,000, then you have $100,000 worth of equity in the house. If your house is worth $200,000 and you owe $250,000 then you have no equity in the house. In fact, your house is negative $50,000 in equity. That negative equity is treated at unsecured debt. Meaning for bankruptcy purposes, it is the same as a credit card.
Secured and Unsecured Debt
Bankruptcy court courts looks at debt two different ways. Secured and unsecured.
Secured debt is a debt that has a lien against a piece of your property. Typical examples of secured property are a mortgage against your house or a lien on your car title.
Unsecured debts are typically credit cards, and collection accounts.
Creditors for secured debts are treated differently than creditors holding unsecured debts. Secured debt is also treated differently from unsecured debt. Most creditors of secured debt are entitled to get their security. Meaning they either get their property back, or it has to be paid for. Most creditors of unsecured debts get nothing or very little of their debt.
The reason why most bankruptcy filers get to keep their house or car is that the debt is secured and there is very little equity. This give us a chance to use the bankruptcy rules to your benefit.
State Law vs. Federal Law
We live in a federal republic. There are 50 states with their own set of laws. Bankruptcy laws are federal. State and Federal laws determine different things. Bankruptcy laws determine whether or not you can break your promise to repay debt. State law determines who has the right to own property.
For example, state law determines whose name is on the title to your car. Bankruptcy law determines whether or not you have to pay your car note.
Chapter 7 Bankruptcy
Automobiles and Motor Vehicles
You have several choices for keeping your car a Chapter 7 bankruptcy.
After you have filed the bankruptcy. the first option is to continue making payments on the auto loan. Whether you owe more than the car is worth or less than the car is worth, the car finance company really only cares about getting paid. So as long as you are making payments they will allow you to keep the car. This is called pay-as-you go. The main advantage of pay-as-you-go is that if you have financial trouble after the bankruptcy is over, you can turn the car back to the finance company without any consequences. Since you are not technically required to pay anything on the loan there is no consequence to stopping paying other than giving the car back.
The second option would be to file what’s called a reaffirmation agreement. A reaffirmation agreement says “even though I do not owe this debt anymore due to filing bankruptcy, I agree to remain liable for the debt owed on the car.” This is not always the best solution but it does have some advantages. The biggest advantage is that if you reaffirm a debt it continues to be reported that on your credit. So it drives your credit score up earlier and faster than if you just pay-as-you-go. The main disadvantage to filing a reaffirmation agreement is that if you do have financial trouble after the bankruptcy is over then you are liable on this debt.
The third option is called Redemption. If you owe more on a vehicle then it’s actually worth, you can purchase the vehicle for its actual value.
You need to come up with the money right away so it’s not an option that everybody can use, but most people owe more on their car than they’re worth and if there is a generous relative or other source of funds, this is a good option.
The fourth option is to immediately finance a new vehicle once the bankruptcy is filed. The interest rate might be higher than normal, but your payment may be significantly lower with a newer model vehicle.
There are also several choices for keeping your house in Chapter 7 bankruptcy.
First, just with an automobile, you can continue making payments. Under most State foreclosure laws, the lender cannot take the house away from you if payments are current. Just as with a car, if you continue making payments, the mortgage will not be reported on your credit.
The primary advantage to pay-as-you-go is that you do not have to find a new place to live and if you do have financial difficulties in the future you can just walk away from the house.
Your second option, just as with a car, is to reaffirm the debt. Once again, reaffirming the debt means you agree to be liable on that debt. The number one reason why people file bankruptcy is to get rid of major debts. Most people owe hundreds of thousands of dollars of debt on their houses, so this is an option that should not be taken lightly. This locks you into major debt despite the bankruptcy. So it gets rid of the reason for filing the bankruptcy, but for some people is a good option.
The third option is to work with the mortgage company to modify the loan while you are in bankruptcy and then take advantage of the bankruptcy discharge. This way you lower your monthly payments and you no longer have the obligation to make the payments.
In the future if you want to move, or if you are having financial difficulties and can’t make the payments, you can just move out. You do not have to worry about what the lender does after you move out.
The fourth option is riskier and really depends on your State’s foreclosure law. In some states, a foreclosure can only happen when a judge issues a foreclosure order. In these particular States, it is a viable option to stop making payments. When the property goes into foreclosure, it may take a year or more before the property is actually sold at auction. This could give you many months to save up to find a new place to live. This is an option that should only be taken if you’re talking to competent legal counsel.
Keeping your house or car in a Chapter 13 Bankruptcy case
Chapter 13 is a special type of bankruptcy. It is a repayment plan where you pay a small portion of your debt over a period of time. Typically, 36 months, but this going to run up to 60 months. One of the features of chapter 13 bankruptcy is the ability to catch up and make payments inside the plan period. So, for example, if you miss 10 mortgage payments you could make those up over 36 months.
Chapter 13 also allows you to cram down certain debts. It can make it possible to remove second mortgages on your house or make it so that you are only paying the actual value of your car as opposed to what you actually owe on the car
One of the functions of Chapter 13 Bankruptcy is the ability to catch up on payments. Even if you are far behind on payments. In a Chapter 13 bankruptcy, you have from 36 months to 60 months to make up the back payments. So if you were 10 months late on car payments, you can make up the back payments over 36 months. This is a totally affordable option and, it is a way to keep your vehicle.
The best thing we can do in a Chapter 13 bankruptcy regarding your vehicle is called “the cramdown”. If you owe more than a car is worth, Chapter 13 allows you to write down the loan. For example, if you owe $15,000 on a car and it is only worth $10,000, under Chapter 13 you can rewrite the loan so you pay the $10,000.00 over the term of the chapter 13 and you pay very little on the rest of the loan. Even better, the interest rate is only 2 points above prime. This is like having your cake and eating it too.
The first option in a chapter 13 bankruptcy is to get caught up on payments. You can make up all of the missed loan payments at no interest over 36 to 60 months. So if you were in a position where you at lost your job but now became re-employed, this would give you a time to get caught up on your house payments. It’s important to note that chapter 13 plan provisions are mandatory on the mortgage company. You make the terms. If it’s approved by the court, the mortgage company has to abide by those new terms.
The second option relates to balloon mortgages. Chapter 13 stops any foreclosure against the home that you are living in. This is particularly beneficial in a situation where a balloon loan has come due. Rather than paying off the whole balloon, you can stretch those payments out for 3 to 5 years and even refinance after a period of time
Third option in a Chapter 13 bankruptcy is to refinance your property after a period of time. Under FHA guidelines a new mortgage loan can be written if you make 12 payments into your chapter 13 plan. Many people have refinanced their home loans as a provision of Chapter 13.
Fourth, a key feature of Chapter 13 bankruptcy is the ability to strip “underwater” second mortgages from your home. Under bankruptcy law, a second mortgage that has no security is considered an unsecured debt. Rather than pay that debt at 100 cents on the dollar, in Chapter 13 Bankruptcy you can pay that underwater mortgage at maybe 10 cents on the dollar and once again you pay that over 36 to 60 months at no interest.
As you can see, most people can keep their house or car when they file bankruptcy. This depends on following all of the rules. It is not something that you can do by yourself. Seek competent, experienced local counsel for the best result.
Finding a Bankruptcy Lawyer
The best place to find a great bankruptcy lawyer is through the National Association of Bankruptcy attorneys (NACBA) or the National Association of Consumer Advocates (NACA). These not for profit organizations are comprised of attorneys who devote their life to helping consumers get a fresh financial start through bankruptcy.
There are other low cost or no cost alternatives available, but these places will treat your case as a commodity (they have to) and you will not get a great result.
Best of luck to you in getting a great financial start!
Author: Joseph C. Michelotti, Esq.
Joseph C. Michelotti is a Chicago area attorney who concentrates his practice on consumer bankruptcy law. His firm, Michelotti & Associates, Ltd., has been helping people with financial difficulties since 1983.
“Our focus is to provide personalized representation of our clients. We use several approaches to find the best solution for each client. Filing bankruptcy is not an easy decision, but we strive to make this a seamless and easy experience for our clients”
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