CHAPTER #18 What About My Car in Bankruptcy?

Bankruptcy can be used to get rid of bad car deals, or help you to pay for a vehicle you want to keep.  You can buy a car on credit after filing bankruptcy, so you may want to dump a gas guzzler or high payment vehicle and get a cheaper one.

If you are like most people, your car is financed.  The U.S. Department of Commerce estimates that, in 1991, the average cost of owning a car that is financed is over $425.00 per month.  The cost of owning a car includes the monthly payment, the interest lost on the down payment or cash value of the trade-in, repairs and maintenance, depreciation (the amount the car goes down in value every month), license and taxes, as well as gasoline and oil.  I have seen more than a few people who are paying more for their car than for their rent.  If they were living in their cars, that would be a good idea!

Many people are suffering from "car fever" when they buy a car.  Dealers have relationships with finance companies that allow them to finance any kind of deal.  If you want to finance a car with a bank or a finance company that has no relationship with the dealer, the first thing a loan officer will do is look up the car in a book which lists the value of the car.  There are several services which provide such information.  Most finance companies or banks that have no continuing relationship with a car dealer will only loan you 70 to 80% of the average retail price for the same type of car listed in the book.  If you are paying more than the average retail price, you will be able to get a loan based on the average price similar cars are usually sold for, not on 75% of what you want to pay.

What does this mean to the average car buyer?  It means that if you are paying too much more than the usual price everyone else pays for similar cars, the "average retail price", you will have to put more money down.  However, finance companies that have regular relationships or agreements with car dealers will lend you almost any amount, regardless of how much the car is really worth.  In other words, they will finance you for the price the dealer got you to pay, not what the car is really worth.

When that happens, often the car is worth less than you owe on it.  If the difference between what you owe, and what you could sell the car for, is very great, you may want to give the car back to the finance company.  Then, you won't owe anything, and you can start fresh and get another car.

Can you get another car, if you have filed a bankruptcy?  This depends on you. If you are filing a bankruptcy, your credit is probably bad anyway right now.  After you discharge your debts, you won't have any payments to make, so you probably will be able to afford reasonable car payments.  If you put some money down, many dealers will finance you again.  Or, you can buy a used car for cash. Or, for what you would spend on a car, you can take cabs.  The trick is to avoid getting into trouble on another car. 

If your car payments are reasonable, and you owe less than the car is worth, or about the same, and you are up to date in your payments, and the car is running good, you will probably want to keep your car even though you are getting rid of the rest of your bills.  This is absolutely no problem.  The finance company will be happy to agree, generally, that your debt will survive the bankruptcy.  This is done in writing, and is called a reaffirmation.

If you are behind in your payments, or don't have car insurance, finance companies will seldom let you keep the car unless you cure those problems.  This is true even when you are not doing a bankruptcy.

Many people come in to do a bankruptcy after the finance company has repossessed the car because they didn't make the payments, or didn't keep it insured.  Sometimes I can get the car returned if they bring the payments up to date, and get insurance, but most of the time they are better off giving up the car.

In a situation where the car has already been repossessed, if you owe less than the car is worth, it might be worthwhile investigating filing a Chapter 13 debt repayment plan.  This is a repayment bankruptcy, and the payments can be restructured if your budget allows it.  Of course, Chapter 13 plans, in which you pay a payment to a court-appointed trustee who sends it to your creditors, are always more expensive than Chapter 7 bankruptcies.

If you have a car that you own, and it is not financed, you need to have me look at the exemptions allowed by law, to see if you could still file a bankruptcy and keep the car, free and clear of any claims of creditors.  In Illinois, if the car is your main asset, and you own it free and clear, and you are the only one on the title, we need to see if you can keep it without having to do a Chapter 13. This may not be a problem, however.  I do many Chapter 7 bankruptcies, especially for married people who own vehicles in joint tenancy, where they have cars and keep them free and clear in a bankruptcy.  It all depends on your individual situation, and a competent bankruptcy attorney can advise you about this.

Example: Ted wrecked his car without insurance. The accident was his fault, and the other driver is suing him. He still owes $6,000 on his car note, and now the car finance company wants to be paid. His brother Bill has a 1989 Camaro. When he bought it, he traded in another car that was not paid off, and his car note now includes money he owed on the old car, as well as what he owes on the new car. Bill's car note is $457 per month. He is current, but wants to give the car back and get a "beater" so he can save some money.

Their friend Ralph is up to date in his car payments, has insurance, but has a lot of medical bills and credit cards. He wants to keep his car and get rid of the rest of his debt.

The Peter Francis Geraci Chapter 7 or 13 Solution: Ted files a bankruptcy and lists the other driver and their insurance company, as well as his own car finance company. Any debts to them will be discharged. He can save up some money, go buy another car, and no one can sue him for the accident, so he won't lose his driver's license.

His brother Bill surrenders his car, and doesn't have to pay a nickel more. He now has no bills, and can save up to buy another car.

Ralph is getting rid of his hospital bills and his credit card debt, so now he can afford his car payment. It is up to date, and the car is insured, so he can keep his car even though he is getting rid of other debt.