.
 

Note that property that is collateral for a purchase-money loan (such as a car securing a car loan or a home securing a first mortgage) is not protected by exemptions from repossession actions by that lender. Any equity you may own in the property is protected and may give you certain rights against holders of judgment liens and second or third lien holders.

Let's repeat that first point before we go further: Exemption laws do NOT protect you from losing property if you've voluntarily pledged the property as security for a loan and you don't make the payments.

Example: 
Unsecured vs Secured Debts

So... for example. If you owe $30,000 to credit card companies, that debt is "unsecured". There is no collateral attached to it. No matter what they threaten, the credit card company can't take any of your exempt property. Likewise, most medical bills and lawsuit settlements are "unsecured" debts. If an unsecured creditor bothers to go to court get a judgment against you, they can get the court to attach a "judgment lien" to your property. But if the property is exempt, you typically can (and should) ask the bankruptcy court to remove that lien from your property (but you have to ask -- its not automatic).

Continuing the example ... If you were persuaded to pay off your credit cards and other unsecured debts with a lower interest, "secured" loan, say, from a loan consolidation company, you probably pledged your home equity or other property as collateral.

As a general principle, once you've voluntarily (i.e. through a contract or signing something) pledged your property as security for a loan, the exemption laws no longer protect you. The creditor can repossess the property you pledged regardless of whether it is protected by an exemption.

Stating your Intention of What You Plan To Do About Your Collateral

The court will ask you to declare what you intend to do about your secured debts, and the collateral that secures them. 

The so called "Statement of Intention" form lays out your options.

Reaffirm? Redeem? Surrender? Ride Through?

  • Choose to keep the car, and
    • reaffirm your personal liability on the debt, via a "reaffirmation agreement with the lender — which keeps you responsible for the debt, despite your bankruptcy.
    • or redeem the property by paying its current value to the creditor, done and done.
  • Surrender it back to the car lender, and
    • wait for the lender to come pick it up (get the keys or tow it), or 
    • ...or "ride through" by keeping making monthly payments on the property as long as the creditor doesn't repossess the car — even though you can't be sued for any personal liability, and hope they creditor lets you keep the car. 
      (This "informal" practice varies widely across the nation. Talk to a local bankruptcy lawyer to determine the custom in your district. Also with used cars rising in value, this practice of letting debtors retain the vehicle is less common if the used vehicle can be easily sold in a hot market.)
      • If you surrender the car, your obligation to pay the car loan is discharged along with your unsecured debts. That's why creditors may be disinclined to let you "ride through", because  if the car stops working  or is damaged, you can simply walk away from it, and not owe anything more — and all the creditor may be left with is the damaged or neglected vehicle's salvage value at the junk yard.

graphic explaning your options re secured debts

graphic explaning reaffirming secured debts

graphic explaning redeeming secured debts

graphic explaning ride surrender

graphic explaning ride through of secured debts

How much could the trustee get for "the bankruptcy estate" if they sold your vehicle?

Would there be anything left after the trustee has paid off:

  • the costs of sale
  • creditors liens
  • your exemption amount

graphic explaning how exemptions work with secured property; unprotected equity

how exemptions work with secured property, fully exempt property

Redemption Options for Secured Auto Loans in Bankruptcy

Bankruptcy offers the option of keeping your secured property by immediately paying it's current replacement value of the object rather than the loan amount. This can be an attractive option for those with auto loans where the value of the car has most likely depreciated faster than the loan balance. However, coming up with the full amount in cash can be difficult if not impossible. In the past few years, a few alternatives have arisen.

Vendors of "Redemption Financing"

The companies listed below specializes in making auto loans to bankrupt debtors seeking the bankruptcy option of "redemption" of their vehicle, whereby the debtor keeps the car by immediately paying the vehicle's current market value (replacement value) rather than the full loan amount over time. These companies will finance a new auto loan (generally through a bank) to produce the cash to pay the redemption amount to your original creditor, and then you pay the redemption amount to the new lender over time. Of course, if you miss payments under the new loan, you'll still lose the vehicle, but at least your monthly payments should be smaller. The new lender takes ownership of the lien on your car. Debtors must have an otherwise good credit history to qualify, and the car must be in good enough condition (i.e. worth enough) to protect the bank's loan.

722 Redemption Financing (via US Bank)

This company specializes in making auto loans (through US Bank) to debtors seeking the option of "redemption" available to those in bankruptcy whereby the debtor can keep a car by paying the current market value (replacement value) of the automobile rather than the loan amount. The company will finance redemption of your existing automobile, or arrange financing for a replacement automobile. Debtors must have an otherwise good credit history to qualify. See the site for more information.

The site has special home pages for debtors, debtors attorneys, creditors, creditors attorneys, bankruptcy trustees, auto dealers.

Of course, if you can't make the payments on this revised amount loan, you'll still lose the car, just to a different lender. So this option is only a solution if you can make the payments on the reduced amount.


ADVERTISEMENT -



Jurisdictional relevance: US

Legal Consumer - Rockdale County, GALaw. The content of this article pertains to all US states and counties.