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Benefit of Car Liens When Filing Bankruptcy

Published August 2, 2021 by Sasser Law Firm
The Potential Benefit of a Lien on Your Car When Filing Bankruptcy

Filing Bankruptcy with a Car Lien

In some situations, an outstanding car loan – and, therefore, a lien on your car – can be helpful if you are filing for bankruptcy. Having an obligation to make car payments may allow you to presumptively qualify for Chapter 7 or reduce your disposable income so that you have a lower monthly payment under a Chapter 13 filing.

Let’s take a look at bankruptcy and car liens and what happens to car liens when filing for bankruptcy.

How Chapter 7 and Chapter 13 Bankruptcy Differ

Chapter 7 and Chapter 13 bankruptcy proceedings offer different approaches to getting relief from unmanageable debt.

Chapter 7 bankruptcy is a liquidation. Under its provisions, the individual’s non-exempt assets can be sold off to raise money to pay off debts. Certain property is exempted from liquidation. If the North Carolina exemptions are used, a debtor is permitted a $3,500.00 motor vehicle exemption. Having a lien on your car can shield it from liquidation since that lien reduces the equity in the vehicle.  Chapter 7 allows the debtor to discharge certain kinds of unsecured debt.

Chapter 13 bankruptcy is a reorganization. It is also known as a wage earner’s plan because, under Chapter 13, people with steady income propose a plan to pay all or a portion of their debt over a period not to exceed five years. There are limits to how much debt an individual can have and qualify to file a Chapter 13 bankruptcy.

What is a Lien?

A lien is a charge against or interest in property to secure payment of a debt or performance of an obligation. A creditor who lends you money – such as for the purchase of a car or house – may require a lien against the property, which is an agreement that they may assume ownership, through foreclosure or repossession, if you default on payments. If you make payments as scheduled, a lien expires when the loan is paid. Institutions in the business of lending money want to be repaid. They don’t want to take possession of property. When they must, they sell it at auction, usually at a loss. And when that happens, the borrower is still responsible for the “deficiency,” the difference between the sale price and what’s left on the loan.

But, if a lender couldn’t get payments out of the borrower when they had the car to drive, getting payments for a car that is long gone is going to be even tougher. At this point, many lenders sell such loans to companies that specialize in collecting bad debt, often through aggressive tactics.

How a Lien on Your Car Impacts Chapter 13 Bankruptcy

Debtors who earn a healthy income but who still need to file a bankruptcy case may be required to file under Chapter 13. In this scenario, they devote their disposable monthly income to repaying creditors. But the less disposable monthly income a debtor has, the less money they may be required to pay creditors in a Chapter 13 case.

Having a lien on a car loan (even a relatively small loan or new loan) can help reduce disposable monthly income for above-median income debtors based on the allowance associated with a leased or financed vehicle provided in the Bankruptcy Code. This reduces your disposable income and may reduce your monthly payment to creditors in your Chapter 13 reorganization plan.

This may or may not be a beneficial approach for you, but it is potentially an option that a bankruptcy lawyer from Sasser Law could help you explore. In some cases, it’s a matter of deciding whether you want your money to go to pay an old credit card bill or go to pay for a car you’re driving every day.

It is worth noting that in some situations, you may be able to “strip down” the principal of the loan to match the value of the vehicle. This is a useful strategy that allows you to keep the car while reducing the amount of debt you have to repay the car loan. Our experienced bankruptcy lawyers can review your circumstances and explain your options.

How a Lien on Your Car Impacts Chapter 7 Bankruptcy

In most Chapter 7 bankruptcy cases, a vehicle can be retained by the debtor if it is exempt and vehicle loan payments are made pursuant to the contract. If you cannot continue to pay for the car, Chapter 7 bankruptcy rules allow you to surrender the vehicle and eliminate all of the debt owed for it, including any deficiency balance.

If a vehicle is not exempt or partially exempt, it can be sold, and the chapter 7 debtor will only receive the exemption amount resulting from the sale.

The Chapter 7 discharge wipes out your obligation to pay qualifying debts. This means the lender or creditor cannot later sue you to collect the debt and cannot execute on a money judgment.

However, a lien does not go away with the discharge of the debt. A lien stays with the property, which means the lien holder’s right to repossess and sell the car remains in effect.

There are three ways to keep a car in a Chapter 7 bankruptcy case: reaffirm the loan, redeem the car, or “retain and pay.”

To reaffirm the loan, you sign a new contract to pay the remainder of the loan. This requires you to demonstrate to the lender and the Bankruptcy Court that you are capable of making the payments.

To redeem the car, you finish paying for the car in a single, lump-sum payment. If the car is worth less than the outstanding balance on the loan, the car’s value is all you have to pay, and the rest of the loan is forgiven. If you pursue this route and you and the lien holder cannot agree on the car’s value, the Bankruptcy Court will decide.

Redeeming the car is a good option if there is a significant difference between the vehicle’s value and what you owe, assuming you can make the lump-sum payment. There are loans specifically for redemption transactions, or you may be able to work something out with a credit union, family member, or friend.

“Retain and pay” means that the debtor makes regular monthly payments on the loan without reaffirming. Most lenders are agreeable to this option, but some are not and will repossess a vehicle where the loan is up to date if the loan is not reaffirmed.

Determining the best approach for you requires a full examination of your financial situation. If you reside in North Carolina and are overwhelmed by debt, the bankruptcy attorneys at Sasser Law can work with you to help you decide the best way forward.

Contact Our Lawyers About Property Liens and Bankruptcy

At the Sasser Law Firm, we are committed to helping individuals and families make the best use of bankruptcy law when it is appropriate and helpful.

The bankruptcy lawyers of Sasser Law have more than 20 years of experience helping people navigate and overcome financial setbacks. Contact us today to set up a free consultation about how we can assist you.

This post was originally published in August 2019 and has been updated for accuracy and comprehensiveness in August 2021

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