What was a common question,

This is pretty arcane stuff, and I don’t expect the above paragraph to mean all that much to the casual reader. However, this is a decision that can be fairly detrimental to the ability of someone to qualify for a Chapter 7 bankruptcy.

Previously, potential clients would often ask me whether I thought they ought to purchase a car before filing for bankruptcy for the purely practical reason that they needed reliable transportation (in very few places in the US is this more true than in the Detroit area of Michigan, where I practice, where there is no real public transportation option) and that, after the bankrutpcy, they assumed that their credit would be shot and that they would be unable to purchase a car.

So long as the client intended to repay the loan and potentially reaffirm the loan (debt incurred within 90 days of filing a bankruptcy petition is highly problematic), I have never had a problem with this line of thinking—although it is not necessarily true that one cannot purchase a car or even obtain financing for a car after a Chapter 7  bankruptcy filing.

However, now, given the decision of the Supreme Court in In Re Ransom, there is an additional reason to purchase a car prior to filing a bankruptcy petition: to get the full “ownership expense” deduction in the means test. I have explained what the means test is elsewhere in this blog, but, essentially, it is an income-based test that determines whether one is eligible for a Chapter 7 or whether one must file a Chapter 13 instead. (Quickly, if your entire household earns more than the median income for a household of its size in the state that you live in based on the immediately previous 6-months’ gross income earned, you are not eligible for Chapter 7.)

There are various deductions that can be applied in the means test that may bring household income down under that crucial median line. One of these deductions is the operating expense and the ownership expense for an automobile. Prior to In Re Ransom, a filing consumer could get the full benefit of both expenses for even an older car owned in full. Now, this is not the case.

Thus, it may be that the next time a potential client asks me whether a car should be purchased prior to filing, the answer may more likely be “Yes!” For some consumers, it may make all the difference.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

First, in a Chapter 7 bankruptcy, it is possible to keep a car without striking a reaffirmation agreement with the loan lender. This is possible if you own the car outright and are not currently making payments to an auto loan lender on the vehicle. If that is the case, it may wholly or partially fit into either the state or Federal exemptions available.  Under the Michigan state exemptions, currently, $2775.00 may be exempted for an automobile. (Note that ”exempted” means that this property or that dollar-value’s worth of property may be “exempted” from the bankruptcy estate that is created legally when a bankruptcy petition is filed and which contains all of your property except that property that is “exempted.”) So, if you own your car outright and its fair-market value is $2775.00 or less (as of this writing), it is simply property wholly owned by you that you may exempt. Under the Federal exemptions, which are used alternatively to state exemptions, the vehicle exemption limit is currently only $2440.00.

Second, a car may be “redeemed” in a Chapter 7 bankruptcy. In redeeming property during a Chapter 7 filing, the debtor makes a lump-sum payment to the creditor for the total fair-market value of the property. This allows the debtor to retain the vehicle free and clear of the obligation to make any future payments, during or after the bankruptcy process. However, many prospective Chapter 7 debtors do not have a sufficient lump-sum available at the time that the bankruptcy petition is filed, and, thus, redemption is not always a viable option.

Third, if you do not own your car outright and are currently making payments on it, it may indeed be reaffirmed in a Chapter 7 filing—but with some caveats.

A “reaffirmation agreement,” first, is an agreement that is struck between the debtor filing for bankruptcy and the automobile loan-provider (or home-loan mortgagee) stating that you are reaffirming the debt you owe to that loan-provider and that you intend to continue paying it either as-is or with modified terms. The reaffirmation agreement keeps the property in question and the terms of payment surrounding it out of the bankruptcy estate.  The agreement, essentially, stipulates that the debtor agrees to continue to be held liable for the full amount of the agreement, even after the bankruptcy discharge occurs, while the creditor agrees to refrain from repossessing the vehicle.

The reaffirmation agreement must be signed before the discharge takes place, and it must be filed with the bankruptcy court. If the debtor is represented by an attorney in his or her bankruptcy filing, the attorney must also sign the agreement, stating that he or she believes that the agreement will not pose an undue hardship to the debtor, and the attorney must further attest that the agreement was signed by the debtor voluntarily and free of any undue influence. If the debtor is not represented by an attorney, the bankruptcy judge must approve the agreement. Additionally, the debtor must file with the court a statement of income showing that remaining disposable income, after the bankruptcy, is sufficient to make the payments required by the reaffirmation agreement.

As to the caveats, there are many. Many attorneys will not sign a reaffirmation agreement for their clients—ever. The primary reason for this is that, when you sign a reaffirmation agreement, you deprive yourself of the opportunity to fully enjoy the protections provided by bankruptcy. It is possible that, at the time you sign a reaffirmation agreement, you feel that you are fully able to handle the continued payments after the bankruptcy discharge. However, hard times may roll around a second time, and you may find yourself unable to continue making those payments at some point after the discharge (and well before the 8 year time-span required between Chapter 7 bankruptcies lapses). At that point, the creditor may not simply repossess the vehicle but will also be able to pursue you to collect the entire amount of the loan—all of which would have been discharged in the bankruptcy without the reaffirmation agreement.

There are ways around this sticky system, however, that an experienced bankruptcy attorney can guide you through to the best possible result.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.