Case Review: Can I file for bankruptcy and keep an expensive car I’m paying for?
This question often comes up when prospective debtors are consulted about bankruptcy. They are struggling with credit card debt and collections. There might have been a cash out or loan against retirement accounts. Very often, however, this fact pattern also includes a relatively new vehicle that’s being leased or financed at something like $600 – $700 per month. For some reason, too, these debtors don’t want to lose this vehicle. On paper, they’re in the red, but they’d like to know if they file for bankruptcy, can they keep paying for this flashy, sometimes even luxury, car. A recent bankruptcy case says no.This case comes out of the Bankruptcy Court for the Northern District of Iowa. In this case, joint debtors (spouses) filed for chapter 7 bankruptcy. In their bankruptcy filing, the documents revealed a monthly net income of -$1,422.22. (In other words, their monthly expenses exceeded their monthly income by $1,422.22.) Part of this huge monthly expense included payments on two vehicles, two 2014 Jeep Wranglers, for which they were paying $1,213.00 per month.
When you file for bankruptcy and have debts that are secured by property, such as a mortgage or a vehicle financing agreement, you have three options. You can surrender the vehicle, in which case it’s up to the creditor to act to take the property back. You can redeem the debt, which means to pay the outstanding balance in full. Finally, you can reaffirm, which means you enter into an agreement reinstating your personal liability on the debt so it remains enforceable against you after bankruptcy, and you keep the property. Reaffirmation agreements have to be reviewed and approved by the court to take effect.
In this case, the debtors sought to reaffirm the debt because they wanted to keep the two vehicles. They argued that they needed the vehicles to get to work, that they had not missed any payments, and that they had very good interest rates with their current car loans. The court found these arguments unpersuasive. First, the court identified that when debtors have negative monthly income, there is a rebuttable presumption that a proposed reaffirmation would be an undue hardship for the debtor. For the reaffirmation to be approved, the debtor would have to rebut that presumption by showing the property securing the debt is necessary in light of their negative income.
The court found that the debtors didn’t show any other circumstances that would indicate they could stay out of bankruptcy if the reaffirmation were approved. By keeping those two payments, the debtors’ monthly income still remains in the negative. Further, the argument that the debtors needed the cars for work, alone, was not enough. The court posited that the debtors could surrender the two Jeeps, go get two different cars that cost $15,000.00 each at a higher interest rate of 18% and end up paying $761.80 per month, thereby saving the debtors $451.20 a month. Ultimately, the court denied the reaffirmation in this case. In re Nielsen, 15-1596-TJC (Bankr. N. D. Iowa, Feb. 12, 2016).
Bankruptcy isn’t a pick-and-choose game. When you file, you’re either all in or you’re not. All debts get included and treated, as do all interests in property of any kind. Additionally, by filing for bankruptcy protection, you also consent to the oversight of your assets by the court. In the bankruptcy case, the trustee and the court will scrutinize the case to see whether the debtors are engaging in behavior that may not be in the best interest for one or more parties. In this case, the debtors wanted to shed debt but keep two cars that, according to their filing, they can’t afford. Courts will not let that take place.