An Arizona bankruptcy lawyer will advise that a debtor can keep one car, provided it has no more than $6,000 of equity.  The equity amount is equal to the fair market value of the car minus what is owed to the secured lender.  If married debtors jointly file bankruptcy, the spouses may keep two cars with no more than $6,000 of equity each or they can keep one car with no more than $12,000 of equity.  If the debtor is disabled, the exemption amount is doubled.  For more information on what property a debtor can keep after filing bankruptcy, click here.

If the car has more than $6,000 of equity, the trustee may elect to sell the car at auction, give the debtor $6,000 and distribute any excess sale proceeds to the debtor’s creditors.  If the debtor has any extra cars with equity, the trustee can auction them and retain 100% of the proceeds.  By the way, debtors may bid on their own property at the auction in order to retain it.

Car loans are tricky to deal with in Chapter 7 bankruptcy

A debtor can always surrender a car in bankruptcy to the lender, and the discharge will erase any car debt remaining.  But most debtors want to keep their cars, especially in Arizona where we have no mass transit to get to work everyday!  After filing Chapter 7 bankruptcy, can the debtor keep the exempt car by simply continuing to make payments on the loan?

Remember that if a debtor doesn’t stay current on secured loans (such as car loans and mortgages), the lender can always foreclose or repossess, with or without bankruptcy.  The 2005 bankruptcy amendments now require a debtor in Chapter 7 to “reaffirm” or “redeem” all secured personal property loans, such as car loans if the debtor wants to keep the property.  This article discusses the reaffirmation option.  For more information on how to redeem a secured vehicle loan, click here.

When a debtor reaffirms a car loan, the debtor is basically making the bankruptcy null and void with respect to the reaffirmed loan.  In other words, if the debtor stops making payments at any time in the future, the lender will repossess the car and be able to sue the debtor for any deficiency amount, even if the debtor obtained a bankruptcy discharge.

For example, assume the debtor owes $25,000 on a car, but the car is only worth $15,000.  The debtor may keep the car because it has less than $5,000 of equity (it actually has zero equity because the amount of the loan is more than the fair market value of the car).  However, a competent Arizona bankruptcy lawyer would advise the debtor that it would be foolish to sign a reaffirmation agreement for the $25,000.  If the debtor lost his or her job and could no longer afford the payments, the car would be repossessed, and the debtor would also be liable for any deficiency amount, regardless of the bankruptcy discharge.  Entering into an enforceable reaffirmation agreement and making the bankruptcy meaningless with respect to one of the debtor’s biggest debts is extremely risky and clearly inhibits the debtor from obtaining a “fresh start” that bankruptcy is supposed to provide.

There is even more troubling news.  If the debtor doesn’t want to put his neck on the line by signing a reaffirmation agreement, the lender has the right to repossess the car, even if the debtor stays current on the car loan! A 2009 Ninth Circuit Court of Appeals case involving Ford Motor Company affirmed this rule.

Why a lender would repossess a car if the debtor is current on payments makes no business sense to me, even if the debtor failed to reaffirm the loan as required under the Bankruptcy Code.  It would seem that the lender would make more money if the lender allowed the debtor to continue to make car payments.  In my opinion, I believe this is the more rational approach that most car lenders are still taking.  However, the risk of repossession exists if the debtor does not sign a reaffirmation agreement, I would recommend just getting a payday loan, just learn about how to make sure you get a good deal on a payday loan

It used to be that the debtor could simply continue to stay current  on the car loan without reaffirming the debt. This was called the “ride-through” provision of the Bankruptcy Code.  If the debtor ever decided to stop making payments in the future after the debtor received a bankruptcy discharge, the lender could only repossess the car.  The bankruptcy discharge prevented the car lender from suing the debtor for any deficiency amount.  Since the 2005 bankruptcy amendments went into effect, the ride-through option is no longer available.

What if the reaffirmation agreement is not approved by the judge?

Here is a little tidbit.  If the debtor is not represented by an Arizona bankruptcy lawyer or the debtor’s lawyer refuses to sign the reaffirmation agreement along with the debtor, then a judge has to approve the reaffirmation agreement in order for it to be enforceable.

If the debtor signs the reaffirmation agreement but the judge refuses to approve it, can the car lender still repossess the car if the debtor stays current on the payments?  The lender may argue that because the reaffirmation agreement was not approved by the judge or signed by the debtor’s Arizona bankruptcy lawyer, then the reaffirmation agreement is not effective, and the lender should still have the right to repossess, even if the debtor stays current on the payments.But it is not the debtor’s fault that the debtor’s Arizona bankruptcy lawyer will not sign the reaffirmation agreement or that the judge will not approve it.  In my opinion, the car lender cannot repossess the car in such a scenario so long as the debtor stays current on the car payments and at least tried to reaffirm the loan by signing the reaffirmation agreement.  The judge’s disapproval of the reaffirmation agreement may allow the old ride-through provision to apply again!  If the judge vetoes the reaffirmation agreement, the debtor has nevertheless complied with the Bankruptcy Code by signing the reaffirmation agreement, preventing the creditor from repossessing the car so long as the debtor stays current on the payments.

Can I guarantee this result?  No.  However, a bankruptcy case from Arizona called In re Moustafi supports this result.  As a result, many of the local bankruptcy judges here in Arizona may issue what is commonly referred to as a “Moustafi order” that expressly prohibits the lender from repossessing the vehicle if the debtor stays current on payments and has signed the reaffirmation agreement that the judge ultimately denied.