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Saving Your House or Car

Almost all of our clients ask, “Can I keep my house in bankruptcy?” or “Will my car be repossessed in bankruptcy?” Sometimes clients ask “Can I get my car back if it was repossessed before bankruptcy?”

Keeping your house and car in chapter 7 bankruptcy cases

If your payments on your house or car are current you can keep your house or car after bankruptcy even if you wipe out all of your other debts. If you want to keep your car after bankruptcy in Illinois, you need to sign a “reaffirmation agreement” with the lender (link here to blog entry on reaffirmations). This is an agreement between you and the lender saying that even though you got rid of, or discharged, all of your debts in your bankruptcy case, you will continue to be personally responsible for your debt on the car. If you don’t sign the reaffirmation agreement on time, you can lose your car even if you are current on your payments and want to keep it.

To keep your car, be sure your payments are current and that you have insurance on the car, with a loss-payable clause in favor of the automobile finance company. And sign a statement of intention to keep the car when you file your bankruptcy petition. Finally, sign the reaffirmation agreement and return it to your Lakelaw attorney as soon as you get it so that we can send it to the creditor within the time permitted by law. Your Lakelaw bankruptcy lawyer in Illinois will assist you with this task. We have to consult with you and assure that court that you can afford the payments after your bankruptcy. If your payments are a hardship, we might advise you not to reaffirm the debt and to seek other alternatives.

If you have a house, and you’re current with your mortgage, your Lakelaw Chicago bankruptcy attorney will advise you about your options. You could reaffirm a mortgage debt but frequently, we will advise you to continue paying on the mortgage as normal even though you will be discharged from personal liability in your chapter 7 case. You may still lose the house to foreclosure if you don’t pay your mortgage but you’ll avoid personal liability if you cannot pay on the mortgage in the future.

If you have equity in your house or car beyond what you can protect through exemptions, a chapter 7 trustee could sell your house or car to pay a dividend to creditors. In this case, your Lakelaw bankruptcy attorneys will advise you of the benefits of filing a chapter 13 case instead of a case under chapter 7. In chapter 13, you make monthly payments over the term of your plan but you get to keep your property.

Keeping your car in Chapter 13

If your car was repossessed before bankruptcy and you file a chapter 13 case, you can usually get the car back as long as you agree to make up any arrearage, keep the car payments current in the future, and keep the car insured. You will have to make all the payments in the amounts you agreed upon in your finance contract unless that contract was made more than 910 days before you filed your bankruptcy case. If your contract was made longer than 910 days before you filed your bankruptcy case, we can provide for payments of a reduced amount as the secured claim under your plan. That amount will be equal to the present value of your car. You’ll have to pay this in full over the term of your plan. The interest rate will also be lower than what you agreed upon in the finance agreement. Any savings will result in a greater payment to your unsecured creditors. The difference between the value of your car and the amount due on the finance contract with the car finance company will be added as a claim to your plan. You won’t pay any more – what you pay will be divided up among more creditors. But at the end of the plan, you’ll own your car free and clear.

Saving your House or Car in Chapter 13 bankruptcy

People frequently file chapter 13 cases to save their house from foreclosure or to save their cars from repossession. Here are questions our clients ask us:

Frequently Asked Questions – Saving Your House or Car

What is a reaffirmation agreement?

A reaffirmation agreement is a contract with your creditor stating that you agree to pay your debt to that creditor – particularly on a secured claim – even though you are getting a discharge from all of your other debts in bankruptcy. In exchange for your agreement to keep paying for the debt secured by the asset, like your car, the creditor agrees not to repossess your car. Your reaffirmation agreement might be on the same terms as you originally agreed to or on new and better terms which your Chicago bankruptcy lawyer or Milwaukee bankruptcy attorney might be able to negotiate for you.

Do I have to reaffirm the mortgage debt on my house?

Not necessarily. If you do, the lender will allow you to pay the mortgage just as you did in the past. Mortgage “servicing” will be just the same as it was before bankruptcy. But you will continue to be personally liable on the mortgage. If you don’t reaffirm the debt, the mortgage lender will continue to accept your payments. However, your mortgage may be serviced differently than it was in the past. You will have to be very careful after bankruptcy to be sure that you don’t fall victim to a technical default which will give the lender a chance to foreclose.

What happens to my modification agreement?

Your pre-petition mortgage modification agreement will remain in full force and effect.

Can I modify my mortgage after bankruptcy?

This is possible. We recommend that you complete your mortgage modification prior to your bankruptcy case if possible. In practice, it is more difficult to modify a mortgage after bankruptcy than before. On the other hand, it is easier to negotiate a short-sale or deed in lieu of foreclosure after bankruptcy than before bankruptcy.

What is redemption?

If you have personal property, like a car, which you are purchasing on credit, it might be worth a lot less than what you owe. Let’s say your car is worth $10,000 and you owe $15,000 on the car. Under the law, you can “redeem” the car from the creditor by paying $10,000 – what you owe on the car. Maybe you have $10,000 at hand. Maybe you can get it from a friend, family member or other source. If you don’t, however, and the car is reasonably new and in reasonably good condition, we can help arrange a bank loan – a redemption funding loan – which will allow you to pay off the car for what it’s presently worth and usually reduce your payment substantially. Ask us about redemption. We’ll raise the issue with you if it seems to be right for you.

How do I keep my house in chapter 13?

If you are behind in your mortgage payments, you have the right to “cure the default” in chapter 13. This means that your monthly payments will be used to make up the monthly payments you didn’t make before the chapter 13 bankruptcy case. This sort of plan makes sense for people who were ill or unemployed for a time but now find themselves back to their normal condition. This sort of plan makes sense if the value of the house is reasonably close to are greater than the value of the mortgage. You have to maintain your monthly payments, insurance and escrow current during your chapter 13 case as well.

How do I keep my car in chapter 13?

Keeping your car is more or less the same as keeping your house. You have to make up the payments you missed before the chapter 13 case. If the car loan is more than 910 days old, you have the possibility of dividing the car loan into two pieces. The first piece is equal to the value of the car. You’ll pay this over the term of your plan. You’ll pay this at a reduced interest rate as determined by the court. The second piece is the amount of the loan in excess of the value of the car. You’ll pay this at a fraction of the amount due just like your other unsecured creditors. We call this procedure “cram down.” You’ll have to get your car appraised and this might require a court appearance. Usually, we can negotiate this without court appearances.

How do I get my car back after repossession?

File a chapter 13 case. Agree to pay any arrearages on your car loan during the chapter 13 case. Keep the car insured. Make the normal payments due on the car loan after you file the chapter 13 case. We will file a motion to compel the financing company to return the car to you. Under an important case called Thompson v. GMAC, the lender must return the car to you.

Case Study

Mr. G. owned a boat. It had over $10,000 due on the boat loan. The boat was only worth $4,000. The boat was very important to Mr. G. We appraised the boat and paid the lender $4,000 from Mr. G’s IRA. Mr. G. got to keep the boat and got rid of a very expensive boat loan.