This is what I was told at a graduation party last week when a table mate found out I am a bankruptcy attorney. It is entirely possible to file or declare bankruptcy and keep two cars. It just is more noticeable when the vehicles are American luxury iron.
Here is a quick rundown on why your neighbor can file bankruptcy and keep two luxury cars. Conceptually some may overlap in one way or another:
- reaffirmed debt on two cars
- keeping cars and paying for them retain and pay
- leasing both
- one in each spouse name and each equity is totally exempt
- chapter 13
- they don’t own the cars
Reaffirm the car loan debt
The hope is that you will learn a lesson when you file bankruptcy. No one wants you to pass this way again. The easiest way to make that happen is to keep repeating the same mistakes. The fastest way to do this is to keep your old debt and remain legally responsible if you default. Signing a reaffirmation agreement for luxury car loans will allow you to keep any car or collateralized asset after you declare bankruptcy.
Retain and Pay
This is the option I recommend for any secured debt. If the creditor permits, just keep the collateral and continue making payments. Your personal obligation will end with the discharge. All you are doing is paying the lien. If you decide to stop paying you don’t owe a dime. The creditor repos the asset, and that’s it. Currently the only two car loan companies that do not allow this are Ford Motor Credit and FirstMerit Bank.
Your neighbor might not hold title to the vehicles at all. They may be leasing. If so, as long as they keep the payments up they keep the cars, even in the face of bankruptcy.
It was probably a stupid move to lease such cars in the first place, but still it might explain why they still have them.
The cars are totally exempt
If the equity in the vehicles is totally exempt, they can keep the cars, or if there is a loan balance they and either reaffirm or retain and pay. There are two exemptions at play for each husband and wife if they own the cars (names on the title) either separately or jointly. The Ohio vehicle exemption is now $3,675 and for bankruptcy purposes only there is a wild card exemption of $1,225. That means if the equity in each vehicle is $4,900 or less they can declare bankruptcy and keep the two Cadillacs.
Chapter 13 Case
If your neighbor filed a chapter 13 case they can pay off the cars in the plan so long as other creditors are paid to the same extent that they would be paid in a chapter 7 liquidation. That is the definition. The way it works is that they will have to pay the creditors a much higher percentage. The Cleveland Chapter 13 trustee will take the position that your unsecured creditors should not bear the brunt of their choice to motor in the lap of luxury.
They don’t even own the cars
Someone else might own the cars and they are paying that person for the costs to operate the cars. It is not uncommon for a relative to buy a car for another who does not have sufficient credit to get one on their own. I normally see this with a grandparent who helps someone get on their feet. It normally involves a modest car with a low payment, not two Cadillacs.
Let’s get down to the fact of the matter. I do not really believe that this guy’s neighbors declared bankruptcy and came out with two cars. Why? The United States Trustee is tasked with making sure that chapter 7 bankruptcy relief is available to HONEST debtors who need help. There is a body of case law that says that if you are in debt with a big payment on a luxury car, you should unload that car, get reasonable transportation, and apply the rest of the car payment money to paying your creditors in Chapter 13. If they don’t like that option, then the chapter 7 case may be dismissed with a 707b motion.
They might have declared bankruptcy and attempted to keep two Cadillacs, but my bet is that they didn’t get away with it.