Can I Keep my Car?


Cars in Minnesota Bankruptcy
Debt is Discharged, not the Lien
To Reaffirm or Not Reaffirm
Tow Trucks After Discharge

Bills & Automatic Payments
Protect Your Car from the Trustee
Cramming Down the Value - or Not


Cars in MN Bankruptcy


Keeping your carWhat happens to my car is one of the first questions I'm asked by most potential bankruptcy clients. Many assume that they will lose their car when filing a bankruptcy. Although there may be some uncertainty in this question, most of my clients - whether it's a Chapter 7 or a Chapter 13 - manage to keep their cars.

Please remember that on this page, as well as my entire site, I am speaking in generalities. There are always specifics which in your case could change the outcome. I'm only trying to give some general information, laying out what ballpark we are playing in. This is certainly not intended for anyone who is trying to do their bankruptcy without a lawyer. When I get questions from people who are obviously trying to do that, I usually say two things: 1) you are making a big mistake and 2) please don't rely on anything I said.


The Debt is Discharged but not the Lien


With few exceptions the general rule is that bankruptcy only eliminates debts; it does not change or eliminate property interests. So when you get your bankruptcy discharge, either as a result of a Chapter 7 or Chapter 13, your personal obligation to pay is gone, but the lender still has a lien on your car.


On the day you file your case, a court order is issued in the form of a notice to all the creditors which contains what they call the automatic stay. In legalese the word "stay" usually means "stop." What the creditors are required to stop is any and all efforts to collect any debt you may owe. At this point, as a practical matter, you will as a result probably be allowed some breathing space if you are behind in your car payments. If you are behind in your payments, the creditor can bring a motion and ask to have the stay lifted, but most of the times with a car they won't do that. They just wait for the automatic stay to expire by itself. The automatic say will normally expire on the day you receive your discharge - usually about 90 day after the date the case is filed.  There are exceptions to this in some cases.


In a Chapter 13, however, the discharge comes at the end of the payment plan three years or five years after filing. Rather than wait all that time, in a Chapter 13 the lender will probably be bringing a motion to lift the stay after you have missed a few payments.


The discharge contains an injunction - another kind of court order about what one is not supposed to do - which prohibits the creditors again from any effort to collect from you personally. BUT this injunction is a bit narrower than the automatic stay in that it permits the creditors to take action against any security in which they have a right. In other words, they can't sue you or take your money, but they can repo your car if you are behind in the payments. OR they could repo just for not signing a reaffirmation agreement - more on that later.


So if going into the bankruptcy you are behind in car payments, you better get caught up before the date of the discharge. If you are my client and I know you are behind in your payments, I'll most likely be reminding you of this in forceful terms. In Chapter 13 there is another very important reason to stay up to date with auto loan payments.  Your Chapter 13 Plan probably has a provision saying that you will keep up the payments.  If you don't do what the plan says, you risk having the case dismissed or being denied your discharge. 


To Reaffirm or Not Reaffirm


A reaffirmation agreement is a contract that reinstates a debt as if the bankruptcy never happened. You have to look at them closely, however, because sometimes they change the original terms. They have to be filed with the court before the date of discharge. They also have to be approved by the judge assigned to your case. If your lawyer will sign off on the agreement, the judge will probably not require a hearing before approving. If your lawyer won't sign off on the agreement - and I do say no sometimes - then you still have a right to do the agreement, but there almost certainly will be a hearing. And I hate to tell you this, but your lawyer is obligated to go with you to that hearing whether he or she thinks it's a good idea or not.


Reaffirmations are usually just not done in Chapter 13 cases. In a Chapter 13 bankruptcy, assuming there is a car with a loan that you want to keep, the payment Plan will require that the loan is to be paid. Most of the time the plan will say that you will just pay the loan directly to the lender yourself as you did before. About the only time you wouldn't pay directly would be in a cram down situation, which I'll explain later. The Plan is legally binding on you and the lender, so once it's confirmed you shouldn't be hearing any complaints from the lender - because the plan is a lot like a reaffirmation agreement.


In Chapter 7 bankruptcies auto lenders have always wanted their debts reaffirmed. Before the 2005 law I tried to avoid these reaffirmation agreements as much as possible, because it was always better for my client to just have a lien on the 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 provides that the forms contain a certification 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 by definition it tends to become very difficult for any Chapter 7 filer to do a reaffirmation without lying under oath. To get the reaffirmation done, one has to say something to the effect that this WILL create a hardship, but not reaffirming could create an even greater hardship. Such statements are very awkward. Everything in the agreement is said under penalty of perjury.


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. The 2005 law actually does allow them to take this position. This puts the 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. Often, however, I will go ahead and help my client do the reaffirmation. I'd rather do the reaffirmation than risk having my client lose a car that is needed for work or essential family transportation.


Tow Trucks After Discharge


If you have not reaffirmed, the creditor has a right to repo even if you are up to date with the payments; but many of the creditors have a policy against that unless you geet behind in your payments.  If I can find out that your lender generally does not repo unless you are behind in payments, I might advise against reaffirming. If you have a creditor which says you don't need to reaffirm, that's probably a good thing but watch out for the following.


I always try to warn my clients about this. It might not make much sense, but you have to keep this in mind. If you had a Chapter 7 and you did not reaffirm and you are now discharged, the lender will tend to consider itself to be under a court order to not bother you or disturb you in any way. Although they can now repo, they are still prohibited from trying to collect the debt. They might be afraid to send you monthly statements, and certainly might be afraid to write you a letter or call you on the phone. If you are behind in your car payments, unlike before the bankruptcy, you might not receive any warning letters or phone calls.


Under those circumstances, you just might see your car heading down the street hanging off the back of a tow truck with no warning whatsoever. You must, just really have to, stay up to date with your payments so this won't happen. Don't expect a warning before the tow truck comes. 


Statements and Auto Pay


When a bankruptcy is filed, some lenders will discontinue sending monthly statements and may also cut off access to the lender's web site. If the creditor set up an automatic payment from your pay check or checking account, they may discontinue that. This is because creditors are under court order to leave the debtors alone. I suggest to my clients 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. They never seem to refuse to accept a payment.


My experience has been that if either I or my clients politely ask - sometimes repeatedly ask or even beg, in writing if necessary - the lender will eventually start sending the monthly statements again. They won't all do it. But most will start sending statements again if requested to do so, especially after the date of the discharge. 


Protecting Your Car


When you file a Chapter 7 bankruptcy, ownership of all your property, including your car, is transferred temporarily to a Trustee appointed by the court. In order to get the vehicle back without buying it back, you must be able to claim the vehicle as exempt. In Chapter 13 the Trustee won't want to claim the car for the creditors, but your Chapter 13 Plan payments will have to be high enough so that the unsecured creditors receive what they would have received if it was a Chapter 7. 


See my Minnesota Bankruptcy Exemptions page for the exact amounts that you may claim for your automobile exemption. You are allowed to claim the equity you have, not the actual value of the car. In other words, the figure you use for claiming the exemption is the value minus the amount of the loan. These exemptions protect the asset from the bankruptcy Trustee, but they do not provide any protection from the automobile lenders. These lenders have a lien which is an ownership interest car. With few exceptions 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.


In either Chapter 13 Bankruptcy or Chapter 7 Bankruptcy, when you owe a lot more than the car is worth, the time may have come to surrender it to the lender. Forget about how much you like car and look at it from a strictly business perspective.



Cramming Down the Value


A "cram down" can only be done in a Chapter 13 case, and then only in certain circumstances. IF your vehicle was purchased over two and a half years before filing your Chapter 13, AND


The value of the vehicle is less than what you owe on the loan, THEN


You might be able to pay the value of the vehicle through the Chapter 13 Plan instead of paying the balance of the loan. This is called a cramdown.


This may sound like a great idea, but I have been finding it harder to do than it sounds. First, the value one must use in this district is usually the NADA retail book value, which probably is much more than the car is really worth. Second, some interest - usually at a lower rate - has to be added in to what you will be paying the lender. Thirdly, the Trustee takes a fee usually of about 7%, which also increases the cost of trying to do a cramdown.


After doing all the required math you may very well find that paying the loan directly is still your best bet; or maybe it's just time to give up and surrender this vehicle. 


For a free consultation by telephone call


Marsh Run


Kelly Law Office

10520 Wayzata Blvd. #100

Minnetonka, MN 55305



The information you obtain at this site is for general information purposes only and is not legal advice. You should consult an 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.  I am a debt relief agency.  I help people file for relief under the federal bankrupty code.


North side of I-394 just east of Hopkins Crossroad. Serving Minneapolis St. Paul area with easy access from western suburbs including Minnetonka, St. Louis Park, Golden Valley, Hopkins, Plymouth.  Also available by appointment only at 8421 Wayzata Blvd., second floor, St. Louis Park, MN 55426. 


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