You can keep your car loan or mortgage.
In both Chapter 7 and 13, you will have the option to keep your vehicle loans and mortgages. There are certain limitations, but generally, if you can afford to stay in the loans, you have the option to do so.
Several factors need to be taken into account to first determine if keeping the loans is an option and then to determine whether it is wise. Your attorney will guide you through this analysis.
The issues to consider with collateralized loans are:
How much equity do I have and why is that important?
The bankruptcy trustee will always be interested in your vehicles and home if the collateral is worth more than what is owed. The key to protecting assets that are worth more than what is owed on the loan is to examine the exemptions that apply to the property. For example, if you own a Honda Accord that is worth $10,000 and you owe $8,000 on a loan for the car, then you have $2,000 in positive equity. You are allowed to have up to $2,500 in equity on a vehicle, so this car would not be taken by the trustee. If the trustee took the car, he or she would sell the vehicle, pay off the bank, pay you your exemption and be left with nothing for the creditors. Thus the trustee will leave it alone.
The same analysis is true for your home. You are allowed to have up to $20,000 in positive equity on your home and still keep it through bankruptcy. If you are filing jointly with your spouse, the two of you can share up to $40,000 in positive equity.
On the other hand, if you have a vehicle loan with severe negative equity on the loan, than you should seriously consider surrending the vehicle in your bankruptcy case. For example, if your Honda Accord was only worth $5,000 and you have a loan for $10,000, then it is likely you would not be able to ever sell the vehicle. If you were to reaffirm, then 1 year after the bankruptcy if you couldn’t afford the car anymore, you would have to come up with approximatly $4,000 (future principal due less sale price) to get the title to the buyer. In other words, you could be stuck with a car you couldn’t afford.
Many clients consider this analysis for their home as well. To keep a mortgage you can barely afford may hinge on the idea that your property value will eventually go up so you have equity again. If you can’t predict that happening for several years, keeping the home may not be the best decision in a bankruptcy.
How many vehicles are in your household?
In both Chapter 7 and Chapter 13, you are usually only entitled to have one vehicle per driver in your household. If you file jointly with your spouse, the two of you can have one vehicle each and can only have a maximum of $2,500 per vehicle. You cannot split up $5,000 in exemption value. For example, if you have $1,000 in equity on your car and your spouse has $4,000 in his or her vehicle, you can’t claim an exemption of $1,000 on yours and $4,000 on the other car. Because you are limited to $2,500 per vehicle, your spouse’s vehicle could be jeopardized in the bankruptcy case. You will want to work closely with your attorney to protect that vehicle.
If you have children who are driving age, we are usually able to protect an additional vehicle in both Chapter 7 and Chapter 13. Consult with your attorney to determine if your situation would warrant this kind of protection.
Interest rates. Chapter 13 cramdown.
As with negative equity, if you have an unhealthy interest rate on your vehicle loan, you may want to consider letting the bankruptcy be your chance to walk away from the loan and surrender the vehicle. Quite often we will see clients breathe a sigh of relief when they learn they can walk away from the 27% interest on a title loan they had signed.
In a Chapter 7, you would surrender the vehicle if you wanted to avoid paying a high interest loan. In a Chapter 13, for loans older than approximately 2 1/2 years, we can perform what is called a “cramdown” on the loan to lower the principal down to current market value of the vehicle and lower the interest rate to approximately 5% or 6%. Often, with newer loans we may not be able to adjust the principal, but we can lower the interest rate. Cramdown is not available for residential mortgages.
What if I have a cosigner?
In a Chapter 7, if you do not reaffirm, your obligation on the loan is severed by the bankruptcy, but your cosigner will still be liable on the loan. If you reaffirm, both your obligation and that of your cosigner will remain in place just as it had been before the bankruptcy.
In a Chapter 7, if you have a cosigner on your car loan, you must understand that bankruptcy will only stop collection activity against you alone. The lender may still take legal action, make collection calls and repossess in an effort to collect from the cosigner. In a Chapter 13, that action is stopped by the codebtor stay.
Chapter 13 and mortgages. How to manage arrearages and additional mortgages.
The many advantages of using Chapter 13 to manage your mortages are discussed with great detail in other sections of this website. The most prominent is the ability to strip a mortgage as well as the ability to immediately bring your loan current and pay past due mortgage arrears over time.