WHAT ABOUT MY HOUSE AND CAR?
THIS PAGE AT A GLANCE
Kelly Law Office
1013 Ford Road
Minnetonka, Minnesota 55305
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 the old law, this was almost never true. The new 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, ff the house or car is security for a mortgage of loan, the debtor must continue payments as he or she did before the bankruptcy if the debtor wants to keep the car or house. So far under the new law we have not seen any mortgage companies try to foreclose as long as the payments are current. We are having a different experience, however, with automobiles.
HOW CAN I KEEP MY HOUSE AND CAR?
Many
clients are relieved to hear us 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. We 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 under the old law we 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. Under the new law, however, a lawyer cannot under the vast majority of circumstances allow a client to reaffirm anything. 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 we have filed under the new law we are starting to run into automobile lenders who 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. So far we have heard of no cases where the cars were actually repossessed when the debtors continued to make the payments without reaffirming. We have seen cases where the lender has threatened to repossess, but so far this hasn't happened as long as the payments were being made on time. Our advice so far to our clients has been: make the payments but don't leave any personal items in the vehicle. We don't think they will repossess as long as you make the payments, but don't be shocked if the lender does. If you have had such a repossession, please let us know. We would like to warn others. So far the lender who has been complaining loudest is Daimler-Chrysler.
The mortgage companies of Chapter 7 debtors have also been pressuring for reaffirmation agreements. So far we have heard of no threats of foreclosure, however, as long as the payments continue to be made. Some lenders, however, will discontinue sending monthly statements and may also cut off access to the lender's web site. We sometimes suggest to Chapter 7 debtors that they should make some extra copies of their monthly statement before we file the bankruptcy with the court, so that if the statements stop coming in the mail, they still have everything they need to make the payment. No mortgage lender we know of has refused to accept a payment.
See
our 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 our 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 if you want to keep your house. Car loans are similar. Work closely with your attorney on these issues, however, because some factors can change the situation entirely, such as when the security is worth less than the balance of the loan. This is general comment and information, not legal advice.
MORE NEW REQUIREMENTS
Depending on what assets you have, you may seriously need to use the Minnesota state exemptions. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which went fully into effect in October 2005, imposes several limitations on your ability to use those exemptions. Here are a few:
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State of Domicile. Under the old version of the bankruptcy code, you were domiciled in Minnesota if you lived here for 91 days. BAPCPA extends this to 730 days, in other words about two years. This is clearly intended to limit one's ability to move from state to state for the purpose of finding better exemptions. If you were not living in any particular state during the last 730 days, THEN to establish your domicile we have to look at where you spent most of your time in the 180 days before that.
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Fraudulent Additions. Under the old version of the code, we used to love to tell our clients to take money or other assets which were not exempt and use that to pay down the balance on their mortgage or car loan. This had the effect of converting a non-exempt asset into an exempt asset. Under BAPCPA we can't do that any more. The bankruptcy trustee will be able to look back ten years for additions to exempt property which were done to "hinder, delay or defraud." We fear that many may be accused of such intent where there was in fact no such intent.
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Homestead Exemption Limits. Your homestead exemption is provided for in the Minnesota Constitution, but it is limited by BAPCPA. The BAPCPA says that you can only claim a maximum of $136,875.00 of homestead equity as exempt if you have lived in that homestead less than 1,215 days - about three years, four months. Only if you have lived in your home longer than that can you claim the full $200,000 exemption provided for under Minnesota law.
Kelly Law Office represents bankruptcy clients throughout the Twin Cities - Minneapolis, Minnesota area including Bloomington, Edina, Minnetonka, Eden Prairie, St. Louis Park, Wayzata, Plymouth, Maple Grove, Brooklyn Park, St. Paul, Anoka, Shakopee, Hastings, Eagan, Burnsville, Buffalo, Hennepin County, Anoka County, Carver County, Scott County, Ramsey County, Dakota County, and Wright County.
The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney 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.