When filing for Chapter 7 bankruptcy, you must think about future financial obligations as well as current debt. When you file, you should consider if you will be able to afford to make car payments after your bankruptcy if you have loaned (financed) or leased your vehicle. If you have leased your car, then you have two choices: to assume (keep) the lease or to reject (break away) from the lease. When making your calculations, be sure to keep in mind that if you assume the lease, then its terms will not change. That means you will still be liable for fees related to the mileage driven above your lease and any damage to the car. If you are in debt because of a car, truck, van, or motorcycle lease, then you should be very mindful when considering how assuming a lease will affect your personal finance in the future.
If you have wanted to cancel a lease, then you will need to indicate your intent on your Statement of Intention (SOI) form, which is submitted to your secured creditors. On the form, you will need to assume or reject a lease(s). If you are going to reject your lease, then you will need to return your car. If you inform your creditors that you will be rejecting the lease, but do not return the car, then the vehicle may be repossessed. If you are accepting the lease, then you will continue making payments as usual.
People filing for bankruptcy with a car loan follow a slightly different process than those with a lease. Your lawyer needs to determine if you have equity in the car. Is a portion of the car your property? Say you financed a car for $10,000 five years ago. Today, you owe $5,000 on the car, which due to wear and tear, and the passage of time is worth $6,000. You still owe $5,000, but you hold $1,000 of equity in your car. If you want to keep the car and continue paying your loan installments, then you may be able to. The amount of equity you own in your car can be considered in your means test, which determines if you are eligible to file for bankruptcy. Many people do not have equity in the cars. Some petitioners do not want to keep their cars, in which case they must surrender it to their creditor. If you want to keep your car, then you will need to sign a reaffirmation agreement. This agreement states you intend to uphold the terms of your loan and will be submitted to your trustee.
If you own your car and do not have any debt on it, then it will be treated as equity. You will need to consult with your lawyer to determine its value and determine if you can keep the car if you file Chapter 7 bankruptcy. The Bankruptcy Code allows various exemptions for equity so that people may keep items such as cars and still be able to get a fresh start by filing bankruptcy.
For help deciding whether or not you should keep your car or if you can in bankruptcy, you should speak to a qualified attorney. Every case is different, and lawyers are experienced in reviewing budgets with clients and explaining the bankruptcy process. They know how to prepare a bankruptcy petition properly, negotiate with the trustee’s office, and handle the 341 hearing (the “meeting of creditors” hearing) in front of the court-appointed trustee. Jayson Lutzky is a lawyer handling personal bankruptcies. He has over 36 years of experience as a lawyer in New York and offers free in-person consultations to prospective clients. Call 718-329-9500 to set up an appointment.