Like all chapters, Chapter 7 of the Bankruptcy Code requires petitioners to list their assets, liabilities, and creditors. Part of the purpose of doing so is candor, but importantly, it tells the Trustee of your bankruptcy estate what he or she can liquidate to pay off creditors before your discharge. One asset people must list, though they may hesitate to do so, is their cars.
Of course, an automobile is a significant asset, often more to the owner than to Trustee. Mass transit isn’t perfect, and many people drive to work.
Fortunately, there are three potential options for keeping your car from getting taken by the Trustee.
One, if you own your car outright, i.e. you’ve paid off your auto loan, you may be able to exempt some or all of its value in the New York or federal exemptions. New York allows petitioners to exempt up to $4,000 in automobile value ($10,000 if used by a disabled debtor) plus a wildcard exemption of $1,000 if the homestead exemption is not used. For older cars that have been paid off, this can be quite a life- (and job-) saver. The federal exemptions are potentially more favorable to auto owners. The government allows an automobile exemption up to $3,450, a wildcard of $1,150, and $10,825 of an unused homestead exemption. This can total to $15,425.
Two, automobile owners have an option called “redemption.” Redemption means the debtor pays the bank the total fair-market value of the vehicle in one lump sum payment. The result is total ownership of the car, which solves the problem completely. Unfortunately, most New Yorkers in Chapter 7 bankruptcies don’t have the cash necessary for a redemption, rendering this option unavailable practically.
Third, if you are making regular payments on your auto loan, one option is to sign a “reaffirmation agreement” with the lender. In a reaffirmation agreement, the borrower promises the creditor that he or she will continue paying the auto loan and keep the car out of the bankruptcy estate. In exchange, the lender does not repossess the car. Aside from keeping the car, one small benefit is that the borrower doesn’t need to use one of his or her exemptions.
There are requirements for a reaffirmation agreement. The debtor must sign the agreement, as must the bank. If the debtor is represented by an attorney (and you definitely should be if you’re contemplating a reaffirmation), the attorney’s signature will also be necessary. The attorney must add that he or she believes the reaffirmation agreement will not constitute an undue hardship on the debtor, which means the debtor will still have some household income after subtracting auto payments and that the debtor did not sign the reaffirmation agreement under duress or undue influence. In circumstances where the debtor isn’t represented by an attorney, the bankruptcy judge will look over the agreement. After the signatures are collected, the bankruptcy judge will enter the reaffirmation agreement into the record for the debtor’s bankruptcy case.
There are, as you might expect, a number of downsides to a reaffirmation agreement.
First and foremost, the auto loan is not discharged in bankruptcy.
Second, in situations in which the debtor isn’t represented, the judge’s opinion goes. Without an attorney, petitioners may end up with an ill-advised reaffirmation agreement, and the judge is unlikely to care as he or she is not their counsel. Often, hardship strikes people’s finances after bankruptcy, and the reaffirmation agreement is like a noose around their necks. If your car is repossessed, and you owe a balance on the loan, you will be unable to use bankruptcy a second time for another seven years. For this reason, many attorneys vigorously discourage their clients from signing reaffirmation agreements. This is the importance of having a good bankruptcy lawyer handle your case.
For more questions about keeping your car, protecting your assets, bankruptcy, the automatic stay and effective strategies for dealing with foreclosure, please feel free to contact experienced chapter 7 bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.