Cars and Bankruptcy in Renton
Strategies for protecting your car in bankruptcy depend on whether your car is paid in full, you are making installments on a purchase contract, you file a Chapter 7 or you file a Chapter 13. Most likely one of these strategies will work for you. Bankruptcy law recognizes that a car is important to a person’s financial well being. Most often it is not an extravagant luxury but an essential element of survival.
If your car is paid in full, bankruptcy laws provide an exemption for cars so they can not be taken by a trustee to pay debt. Both state and federal automobile exemptions are approximately $3500. You can also stack a wild card exemption on top of your car exemptions. The wildcard in Washington is $3,000 and under federal law it is $11,975. Both options are available to people who file bankruptcy in Washington (though you can not mix state and federal exemptions on one bankruptcy case). If you are making payments on a car and the car is worth more than the loan balance, you must apply these exemptions to the equity in the car to protect it.
In a Chapter 7 case, a paid in full car or car equity that exceeds your exemptions can be sold to pay creditors. In a Chapter 13, you can pay the creditors what they would have received from the sale of the car with monthly payments instead.
If you are making payments on a car in a Chapter 7, you can keep the car if you continue making the payments. Many times you can simply keep making the payments but if you do not sign a “reaffirmation agreement” the car finance company may repossess the car even if you are current. Because the reaffirmation agreement shifts the risk of a default to you, it would be a good idea to avoid signing it if possible. You may want to ask your finance company about their policy regarding reaffirmations.
Another option in a Chapter 7 is a redemption. The redemption allows you to pay a car loan in full at the value of the car. This is only a good option if the car is worth significantly less than the loan balance. Some finance companies offer loans that you can use for a redemption.
In a Chapter 13, you can pay off a car loan over five years. For cars purchased over two and a half years ago or refinanced car loan, you can “cram down” the loan in Chapter 13. A cram down means you enough to cover the value of the car as “secured”, meaning you pay that part in full at a reduced interest rate. Anything over that you pay as “unsecured”, on which you can pay as little as 0%. Chapter 13 offers reduced interest on high interest car loans, restructures your debt load, gets your cash flow under control and often allows you to spread out payments to reduce your monthly amount.