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Chicago Bankruptcy Basics: Vehicles in Chapter 7

This week's Chicago Bankruptcy Basics topic is vehicles in Chapter 7 bankruptcy.  It is not really relevant what type of vehicle we are talking about, be it an automobile, motorcycle, snowmobile, fishing boat or helicopter, as the basic bankruptcy theories surrounding vehicles is the same throughout Chapter 7.

First and foremost, when you file for Chapter 7 bankruptcy, all vehicles that you have a legal interest in must be disclosed to the court.  This not only includes your everyday car, but also any vehicles that you jointly own with another (even if that other is paying for it), leased vehicles, vehicles that someone else owns that you have possession and use of and, of course, the vehicle in pieces in the garage that you swear you are going to rebuild one day.  Each vehicle has to be listed at its fair market value and any liens against the vehicle, such as an auto financing contract, must be disclosed with the creditor receiving notice of the Chapter 7 bankruptcy filing.

If the vehicle is paid in full when you file for Chapter 7 bankruptcy in Chicago, then the only issue is whether or not the value of the vehicle is protected by your exemptions.  Each filer has one motor vehicle exemption of $2,400 and one personal property exemption of $4,000.  If the legal interest of the filer exceeds their exemptions, then the Chapter 7 trustee assigned to the bankruptcy case has the right to liquidate (sell) any unprotected vehicle and use the proceeds to pay down or off the creditors in the case.  If a vehicle is only partially protected, the Chapter 7 trustee still has the right to sell it, but must pay the filer the amount of the claimed exemption before sending any funds to the creditors.  Often times a deal can be worked out with the trustee wherein the filer "buys out the equity" from the trustee and thereby keeps the vehicle.  Most people who file for Chapter 7 bankruptcy either do not have a paid in full vehicle or the value of the paid in full vehicle is under the claimed exemption, thereby being protected.

Most vehicles scheduled in Chapter 7 bankruptcy are financed.  The first determination for a financed vehicle is almost the same as for the paid in full vehicle.  The value of the vehicle must be scheduled and it must be determined if there is any equity in the vehicle after both paying off the loan against it and any exemptions claimed on it.  As above, if there is excess equity in a vehicle, the Chapter 7 trustee has the right to sell the vehicle and use the proceeds to pay the creditors.  Usually there is not, as most vehicles are worth less than what is owed on them.

This is not the end of the analysis, however.  It must also be determined whether or not the vehicle is necessary for an effective reorganization and fresh start.  This is done on a case by case analysis, but common sense still rules the day.  It is generally not considered reasonable for a filer to continue paying for a brand new luxury vehicle, unnecessary second automobile, recreational boat, motorcycle that is not their primary transportation, etc. while they are seeking a discharge of their other debts.  The court may require that these items be surrendered back to the lender in order for a filer to receive a Chapter 7 discharge.

Most financed vehicles in a Chapter 7 bankruptcy are the sole transportation of the filer and are protected by the loans and exemptions.  In this case, the filer has three real options.  First, they can surrender the vehicle back to the lender and allow their liability to be discharged in the Chapter 7 bankruptcy.  Lose the debt, but lose the vehicle as well.  Second, they can elect to reaffirm the debt.  Reaffirmation is a process by which a written agreement is executed reattaching the filer's personal liability to the debt, allowing them to retain the vehicle and maintain their payments.  So long as the payment is current, reasonable and feasible, there is insurance on the vehicle and the filer wants to keep the vehicle, reaffirmation is the most common option elected.  Sometimes reaffirmation agreements can be negotiated to lower the filer's payment, but not often.  Third, a filer can attempt to redeem a vehicle.  In a redemption, the filer, through their attorneys, prosecute a motion with the court offering to purchase the vehicle outright from bankruptcy estate for its fair market value.  The purchase price goes to the lender and the lien is released from the vehicle, giving the filer clear title.  The only problem with redemption is that it does require a lump sum payment, which most people filing for Chapter 7 bankruptcy cannot afford.  There are lenders out there who will work with people in bankruptcy, but the interest rates are high, so it must be a worthwhile deal to go forward with it.

If you have one or more vehicles, financed or paid in full, and are considering filing for Chapter 7 bankruptcy protection in Chicago then you need the representation of a qualified bankruptcy attorney.  A good bankruptcy lawyer will analyze the equity in your vehicles at your initial consultation, review your options, warn you of any risks, recommend a course of action and develop contingency plans to ensure that you keep the vehicles that you intend to.  The Chicago bankruptcy lawyers at Ledford & Wu are always happy to provide a free consultation to discuss your options.

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