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When One Files Bankruptcy In California, What Happens To The Vehicle?

Chapter 7.

In Chapter 7, there are two issues with respect to vehicles:

1. Will the Chapter 7 trustee--effectively an independent contractor hired by the government to review the case and determine whether any assets ought to be liquidated or sold to repay the creditors at least in part--want to sell the vehicle in order to pay the creditors? There are four types of assets that a trustee will NOT wish to liquidate:

a. Those that are encumbered by liens leaving little to no equity. For example, if the debtor owns a vehicle worth $10,000 but still owes $15,000 to a lender, the trustee will have no economic incentive to take the vehicle and sell it since he or she would have to pay the proceeds to the lender.

b. Those that are leased. Leased vehicles, virtually by definition, lack equity, so they are unattractive to bankruptcy trustees.

c. Those that are exempt. State law allows debtors to protect a certain amount of their assets. California has two sets of exemptions of which one set or the other, but not both, must be selected:

1. The "homestead" set of exemptions, found in California Code Of Civil Procedure Section 704. Under the homestead set of exemptions, a debtor can exempt up to $2,900 of equity in one vehicle.

2. The "wildcard" set of exemptions, found in California Code Of Civil Procedure Section 703. Under the wildcard set of exemptions, a debtor can exempt up to $5,100 of equity in one or more vehicles. Note, however, that under the wildcard set of exemptions, one may exempt up to $25,575 of assets that are not otherwise exempt in their own categories. For example, one can exempt a certain amount of pension funds, life insurance, jewelry, etc. So, if the debtor is not otherwise using the wildcard exemption to protect other items, such as bank account funds, the debtor can exempt up to $30,675 ($5,100 plus $25,575) of vehicle equity.

d. Those that are more burdensome than beneficial. If a vehicle has lots of years and lots of miles and is accordingly only worth $1,000 or $2,000 and therefore more trouble than its worth, a trustee may very well ignore it even if it not encumbered, not leased, and not exempt.

2. How does bankruptcy affect the lienholder? Look at the lienholder as having two very separate and distinct interests--it holds a lien and its holds a debt. Bankruptcy discharges debts, and auto loans are, for all intents and purposes, not an exception to that rule. However, the lienholder still retains its lien against the vehicle and bankruptcy generally has no impact on the validity or status of liens. So, even if the bankruptcy trustee is not interested in taking the vehicle, the debtor still needs to make ongoing monthly payments to the lienholder, else the lienholder will want to repossess its collateral by selling the vehicle at auction. The lienholder loses the right to pursue a deficiency against the debtor if the auction fails to generate sufficient proceeds to retire the debt, but payments must still be made to avoid repossession.

Note that some lenders--specifically, Ford Motor Credit, Daimler Chrysler, Mercedes-Benz Credit, Jaguar Credit, and Cab West, LLC--will insist that the debtor execute a "reaffirmation agreement," which is effectively your agreement that the underlying debt will not be discharged in the bankruptcy, in order to prevent it from repossessing the vehicle.

Accordingly, in Chapter 7, if you wish to keep your vehicle or vehicles, continue to make your monthly payments, and don't have more equity in that vehicle, or those vehicles, than state exemptions permit.

Chapter 13.

In Chapter 13, there is literally NO risk that the bankruptcy trustee will sell vehicles to pay creditors because in Chapter 13, trustees lack the authority or power to sell assets. State law exemptions apply in Chapter 13 as well, but if the debtor owns a vehicle that is not exemptible under state law, the vehicle will not be sold by the trustee; having equity in a vehicle, or for that matter other assets, would only affect how much the debtor must pay his or her creditors over the three to five year plan period.

As far as the lienholder is concerned, a Chapter 13 debtor has a few options:

1. Continue to make payments directly to the lienholder "outside the plan."

2. Force the lienholder into accepting payments over the three to five year plan period equal to the value of the vehicle, discharging the difference between the balance owed and the value of the vehicle.

3. Force the lienholder into accepting payments over the three to five year plan period equal to the balance owed.

4. Surrender the vehicle to the lienholder and discharge the debt to the lienholder.

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