What About my House and Car?
THIS PAGE AT A GLANCE
Kelly
Law Office
10709 Wayzata Blvd. #205
Minnetonka, MN 55305
Phone: (952) 544-6356
Fax: (952) 525-7924
Mobile: (612) 735-3797
dave@kelly-law.com
Serving St. Louis
Park, Golden Valley, Hopkins, Plymouth, Wayzata, Minneapolis-St.
Paul, Minnesota.
INTRODUCTION
What happens to my house and car are the first questions we are asked by most potential bankruptcy clients. Many assume that they will lose their house and car when filing a bankruptcy. Under pre-2005 law, this was almost never true. The 2005 law injects more uncertainty into this question. Most homes and most automobiles are exempt from seizure by creditors, and these exemptions can be used to protect these assets when you file for bankruptcy. The exemptions provide protection from everyone except the mortgage company or automobile loan company. At a minimum, if the house or car is security for a mortgage or loan, the debtor must continue payments as he or she did before the bankruptcy if the debtor wants to keep the car or house. Most mortgage companies - with the exception of TCF - will not foreclose as long as the payments are current. We are having a different experience, however, with automobiles.
If you owe a lot more than an automobile or home is worth, the time to surrender it to the lender may have arrived.
CAN I KEEP MY HOUSE AND CAR?
Many clients are relieved to hear me advise, in most Chapter 7s and in many Chapter 13s as well, that if they can afford to do so, they should keep paying their home mortgage and car loan the same as if they were not in bankruptcy. I don't always advise this, but in many cases it's the best thing to do. This is because while the bankruptcy discharge may get rid of the debt, it does not get rid of the security interest which the auto loan company has in the car; and it does not get rid of the security interest which the mortgage lender has in the house. This means that unless they are owned free and clear, if you want to keep your car, eventually the loan must be paid; and if you want to keep the house, eventually the mortgage must be brought up to date. The filing of a Chapter 7 bankruptcy can result in a delay in foreclosure of a mortgage and in the repossession of a car. After such delay, however, the security must eventually be surrendered to the creditor if the debtor is not able to make payments.
In Chapter 7 bankruptcies auto lenders and mortgage companies have always wanted their debts reaffirmed. A reaffirmation agreement reinstates the debt as if the bankruptcy had never taken place. Previously before the 2005 law I tried to avoid these reaffirmation agreements as much as possible, because it was always better to just have a lien on the house or car without being personally on line for the debt. If for example the car was totaled in an accident and the insurance wouldn't cover the entire balance of the loan, the debtor who had not reaffirmed would not have to pay any more for a car that was gone.
Since the passage of the 2005 law, there is even more reason to not reaffirm. This is because the new law requires a certification, both by the lawyer and the debtor, that the payment of the reaffirmed debt will not create a hardship. The fact is that every financial expense creates a hardship in the life a debtor who qualifies for a Chapter 7; so that by definition it becomes nearly impossible for any Chapter 7 filer to do a reaffirmation without lying under oath.
In the Chapter 7 cases it is common for automobile lenders to insist that the filing of the Chapter 7 violates the loan contract; and that the debtor must either surrender the vehicle or reaffirm the debt. Since reaffirmation is practically impossible, this puts some debtors in a tight spot. I have heard of a few cases where the cars were actually repossessed when the debtors continued to make the payments without reaffirming. There are also cases where the lender has threatened to repossess, but hasn't done it as long as the payments were being made on time. What I've been trying to do is speak by phone with someone from the lender who can tell me what the policy is. If they insist on a reaffirmation, it might be time to surrender the car.
The mortgage companies of Chapter 7 debtors have also been pressuring for reaffirmation agreements. There is one lender which has threatened to start foreclosure because a debtor would not reaffirm; but as far as I know that lender has never actually done it. Except for that one, all other lenders as far as I know don't threaten foreclosure as long as the payments continue to be made. In my opinion foreclosure for no other reason than refusal to reaffirm is in violation of the bankruptcy statute; and although there may have been some threats, no lender I know of has actually tried to do so.
When a bankruptcy is filed, some lenders will discontinue sending monthly statements and may also cut off access to the lender's web site. This is because they are under court order to leave the debtor alone. I suggest to debtors that they should make some extra copies of their monthly statement before we file the bankruptcy, so that if the statements stop coming in the mail, they still have everything they need to make the payment. No mortgage lender I know of has refused to accept a payment.
See my exemptions page for the exact amounts that you may claim for your homestead and automobile exemptions. In both cases, you are allowed to claim the equity you have, not the actual value of the car or house. In other words, the figure you use for claiming the exemption is the value minus the amount of the loan or mortgage. These exemptions protect the asset from the bankruptcy trustee, but they do not provide any protection from the automobile lender or the mortgage company. These lenders or mortgage companies have an ownership interest in your house or car. The bankruptcy does not change their ownership interest, and so such lenders have to be dealt with by at least continuing the payments if that is possible.
The rules are different in a Chapter 13 bankruptcy, but in my experience the debtors almost always get to keep their home and vehicle, as long as they can make the payments. In a situation under Chapter 13 where you are seriously behind in mortgage payments, the arrears can often be paid as part of the plan; but while this goes on, the current payments on the mortgage must usually be paid outside the plan. Car loans are similar. Work closely with your attorney on these issues. Some factors can change the situation entirely, such as when the security is worth less than the balance of the loan.
In either Chapter 13 or Chapter 7, when you owe a lot more than a car or house is worth, the time may have come to surrender it to the lender. Forget about how much you like the house or car and look at it from a strictly business perspective.
Kelly Law Office represents bankruptcy clients throughout the Twin Cities - Minneapolis, Minnesota area including Champlin, Crystal Bay, Dayton, Eden Prairie, Excelsior, Hamel, Hopkins, Howard Lake, Long Lake, Loretto, Maple Plain, Minneapolis, Minnetonka Beach, Minnetonka, Mound, Navarre, Osseo, Rogers, Saint Bonifacius, Saint Paul, Spring Park, Wayzata, Young America, Bloomington, Edina, St. Louis Park, Wayzata, Plymouth, Maple Grove, Brooklyn Park, Anoka, Shakopee, Hastings, Eagan, Burnsville, Buffalo, Waverly, Montrose, Hennepin County, Anoka County, Carver County, Scott County, Ramsey County, Dakota County, and Wright County.
The information you obtain at this site is for general information purposes on and is not legal advice. You should consult the attorney of your choice for individual advice regarding your own situation. The use of the Internet for communications with the firm will not establish an attorney-client relationship and messages containing confidential or time-sensitive information should not be sent.