One issue that concerns many people before they file for bankruptcy is whether the court will let them keep their car. The answer depends, first, on whether the person owes any money on the car. If they paid off their car loan, then they get to keep the car as long as its value does not exceed the state’s vehicle exemption. If the person still owes money on the car, then that may complicate the issue. People in that situation can choose to either walk away from the car or keep making payments on it.
(1) Walking Away from the Car If a person wants to surrender their car rather than trying to keep making payments, then they simply fill out a form in the bankruptcy process that declares their intent to give up the car. Then, they turn the car over to the lender, and that clears them of the debt.
(2) Keeping a Car You Are Still Paying for If a person wants to keep the car and still needs to pay it off, then they must continue to pay for the car throughout the bankruptcy. However, the law provides multiple options for making this payment. First, a filer may choose to make a lump sum payment to the lender equal to the car’s current value. Second, the filer may enter into a new agreement with the lender to continue to pay off the car, often on similar terms. This is known as reaffirming the promissory note. Third, in some cases lenders may not make the filer enter into a new agreement, and they can simply choose to keep paying on the original schedule.
(3) Negotiating with the Lender to Keep the Car The lender may choose to let the filer keep the car without making the filer reaffirm the note. If that happens, then the filer simply continues to make payments on the old schedule. If the filer defaults, then the car goes back to the lender, but the filer may stop making payments because the bankruptcy will wipe out the remaining debt. If the lender requires a reaffirmation of the note, then complications may arise. If a filer reaffirms the note and then fails to make payments, then the lender may repossess the car. Additionally, the filer will still owe the remainder of the balance, since the bankruptcy would not eliminate it.
Warning: Because such reaffirmations can pose risks to the filer, courts must review their terms before they enforce the agreements. If the judge approves the agreement, then it goes into force, and the filer must follow its terms until they pay off the car. If the judge denies it because they feel that the terms are not in the filer’s best interest, then the filer may still get to keep their car.
For more information about how bankruptcy will affect your property, please contact Newland & Newland today. We provide support to clients in Lake County, McHenry County, Cook County, DuPage County, Crystal Lake, Arlington Heights, Barrington, Palatine, Rolling Meadows and throughout Northern Illinois.