Owning a car is more than just having a means of transportation, as a vehicle is essential for you to get to work, attend personal errands, and support your family. Considering the important role it plays in your life, you no doubt have concerns about what happens to your car after bankruptcy in California. You might be aware that the bankruptcy court can take certain assets, and living without a car is not an option. Fortunately, you may have access to better options. Protecting your vehicle is possible in many cases.
However, the issue of whether you can keep your car has a lot to do with the type of bankruptcy you file and how you take advantage of the relevant rules. Chapter 7 or Chapter 13 may be more suitable for your situation, so it is important to get legal advice if you want to protect your vehicle. A California bankruptcy lawyer will explain both types in detail, guiding you in making important decisions. Some background on the process is also informative on how vehicles are handled in Chapter 7 and Chapter 13.
Overview of Chapter 7 Bankruptcy
With Chapter 7 bankruptcy, you can discharge all qualifying debts if you meet the eligibility criteria. The rules are quite strict, and they focus on your income. You may automatically qualify for Chapter 7 if your pay falls below the state median income. Even if your earnings are higher, you may still be eligible through the Means Test. This assessment starts with your income and then subtracts the amounts you pay for important monthly expenditures. The end result could meet the requirements of the Means Test.
A critical point to note is that Chapter 7 may involve the liquidation of your assets. The bankruptcy trustee can sell certain items that you own to pay debts to creditors before discharge, so your car could be at risk. Not all assets can be liquidated, and you can protect some through the use of exemptions. This would be the strategy to protect your vehicle from being sold, but exemptions also cover a wide range of other assets.
How Chapter 13 Bankruptcy Works
Under Chapter 13 of the US Bankruptcy Code, you enter into a debt repayment plan to resolve the amounts you owe to creditors. Your debts are combined and then reduced to a monthly payment amount that you continue with for 3 to 5 years. Once the debt repayment plan is complete and the case concludes, the remaining debt is discharged.
Many filers must go with Chapter 13 because they do not qualify under the strict income rules for Chapter 7. The main eligibility rule for Chapter 13 is that you need employment or a source of income to ensure you stay current with your debt repayment plan. Other people choose Chapter 13 regardless of whether they qualify under Chapter 7 because of the liquidation factor. In Chapter 13, your assets cannot be taken and sold by the bankruptcy trustee. If you have significant assets you do not want to lose, including your car, Chapter 13 might be an appropriate option for your circumstances.
Your Car in Bankruptcy
With a better understanding of how the two types of bankruptcy work, you can appreciate what happens to your car. Fortunately, you have choices:
Chapter 7: You are permitted to use exemptions to avoid having your assets liquidated, including your vehicle. California allows you to apply one of two systems, and you will be able to protect up to $3,625 or $6,375 in value depending on which option you choose. This offers protection for your equity in the car only. If you have financing on your car, you will need to address the loan. Your vehicle acts as security, so it could be repossessed. In Chapter 7, you might consider reaffirming the loan to re-establish the contractual relationship with the lender. You could also surrender your car to discharge any balance due or redeem it by paying cash.
Chapter 13: Your car cannot be liquidated by the bankruptcy trustee, but it can still be repossessed by the bank. Fortunately, unlike Chapter 7, you can work late fees and interest into your debt repayment plan. Another option is to use a “cram down,” a bankruptcy rule that allows you to reduce the terms of your loan to your advantage.
Benefits of Chapter 7 and Chapter 13
You are probably aware that your credit score will take a hit when you file for bankruptcy. Chapter 7 remains part of your history for 10 years, while Chapter 13 stays on your credit report for 7 years. These are significant impacts on your financial situation, but the cons must be weighed with the pros of bankruptcy to make a wise decision on your future. Some benefits to keep in mind are:
- With both Chapter 7 and Chapter 13, you emerge from the process debt-free. Not all debts can be discharged, but you eliminate the heaviest burden of unsecured debt.
- There is an automatic stay in bankruptcy cases, which prohibits creditors from attempting to collect a debt while your case is pending. Creditors cannot call, harass, file a collection lawsuit, garnish wages, or foreclose on your home.
- You will no longer be paying amounts for interest and late fees to creditors, without ever reducing the total debt owed. Not filing bankruptcy means you could be making these pointless payments for decades.
Getting Help from a Bankruptcy Lawyer
Protecting your vehicle from liquidation or repossession is a priority, but the treatment of your car is just one aspect of the bankruptcy process. Whether Chapter 7 or Chapter 13 is the right fit, you can count on your bankruptcy attorney to tackle the legal requirements. Some of the tasks that your lawyer will handle include:
- Helping you gather, sort, and organize important financial documents that will be used for your bankruptcy petition;
- Advising you on exemptions, which include your car and many other items;
- Filing the bankruptcy petition, along with schedules;
- Attending the meeting of creditors with you, where you will be questioned about your petition and financial matters; and,
- Finalizing the case through an order of discharge.
A California Bankruptcy Attorney Can Explain Details
If you are considering filing for Chapter 7 or Chapter 13, it is essential to know what happens to your car after bankruptcy in California. Our team at Kostopoulos Bankruptcy Law can explain details and how the rules apply to your unique situation since keeping your vehicle is important for life’s activities. We will also handle all filings and court proceedings throughout the process. For more information, please contact our firm to set up a consultation with a skilled California bankruptcy lawyer.
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