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How Does Bankruptcy Protect My Car?


More people than ever use bankruptcy to protect their motor vehicles. High loan interest rates and high inflation have propelled auto loan delinquency rates to near historic highs. Bankruptcy’s Automatic Stay is like a force field that surrounds your car and keeps the repo man away, regardless of the amount of delinquency.

Section 362 of the Bankruptcy Code, dealing with the Automatic Stay, is just one of the advantages of bankruptcy. Others include asset protection and unsecured debt discharge. All of this protection and all of these benefits add up to a fresh financial start for you and your family. An Irvine bankruptcy lawyer maximizes these benefits and therefore helps you get the most out of your fresh start.

The Automatic Stay Up Close

Legally, banks may repossess automobiles if one payment is one month late. Many new vehicles have remote ignition disabling devices. Banks can trigger these devices and immobilize the vehicle if a payment is more than two weeks late.

The Automatic Stay applies the moment a Costa Mesa bankruptcy lawyer files a petition. Section 362 blocks most creditor adverse actions, such as:

  • Repossession;
  • Creditor harassment;
  • Eviction;
  • Wage garnishment; and
  • Foreclosure.

The Automatic Stay is immediately effective, but creditors are only bound by it once they receive notice of the filing. This requirement is often tricky.

Once an auto loan enters the delinquency/collections phase, several companies get involved, such as the bank that loaned the money, the servicer that manages the loan, a debt buyer that attempts to collect the debt, and a vehicle repossession company.

Understanding the Vehicle Exemption

California, unlike other states, has two sets of bankruptcy property exemptions. Debtors may choose System One ($3,625 vehicle exemption) or System Two ($6,375 vehicle exemption). These systems differ in other ways as well.

The dollar figure in each exemption refers not to the vehicle’s fair market value, but rather to the amount of the debtor’s equity in the vehicle.

Banks amortize vehicle loans. Amortized loans apportion payments differently. During the first half of the loan, most of each monthly payment goes to prepaid interest. The bank pays itself first. So, if you drive a newer car, absent a sizable initial down payment, you likely have no equity in the vehicle.

Older, used cars are on the opposite end of the scale. After 2-3 years of making payments, and absent the inclusion of negative equity from a vehicle trade-in at the time of purchase, the owner will have considerable equity in the vehicle.

Recall, however, that the exemption value for vehicles in a Chapter 7 bankruptcy is different from the vehicle’s fair market value. The law requires debtors to declare the as-is cash value (a.k.a. the garage sale value) in Schedule A. Most vehicle investors (the we-pay-cash-for-cars-in-any-condition people) offer pennies on the dollar. The low value stretches the equity exemption.


A few final words about an auto loan reaffirmation agreement. Most debtors agree to keep making payments, so they can keep their vehicles. The reaffirmation agreement gives an attorney a chance to renegotiate key loan terms, such as the interest rate. A slight interest rate reduction could save the owner thousands of dollars.

 Rely on a Detail-Oriented Orange County Lawyer

Regardless of your financial problems, there’s usually a way out. For a free consultation with an experienced bankruptcy lawyer in Santa Ana, contact The Law Office of Charles A. May. We routinely handle matters throughout SoCal.

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