Making payments to a court trustee during the bankruptcy process can create confusion for some people who don’t fit the typical mold of a bankruptcy candidate. Paying off a car or getting a title from the lender, rather than surrendering the title in a Chapter 7 case or reaffirming the loan in a Chapter 13 case, can present some unfamiliar waters for bankruptcy filers to tread.
In a Chapter 7 bankruptcy case, the court liquidates a debtor’s possessions and distributes the funds to his creditors. Unless the debtor chooses to liquidate the car, or the court forces liquidation, the debtor typically must reaffirm the car loan and continue making regular payments until the loan is fully paid. In a Chapter 13 case, the court often requires lenders to accept some type of reduction in payments. This reduction could take the form of a reduced principal balance, lower interest rates or even a write-off of some portion of the debt. In exchange, the court ensures the lender gets paid by collecting funds from the debtor and making payments directly from the court. The lender considers the debt paid in full when the Chapter 13 case comes to a close and the borrower receives the title shortly after a discharge.
In some cases, a borrower in bankruptcy may sell a financed car for as much as or more than the original outstanding debt. If a buyer sells a financed vehicle, he should work with the bankruptcy trustee to convey the amount of the original debt to the lender. The lender can release the title at that time, and the debtor can formally transfer ownership of the vehicle to the buyer.
When a debtor goes into bankruptcy, he gains a considerable court-enforced advantage over the lender. As part of this advantage, according to the Sabantini Law Firm in Pennsylvania, a debtor may ask the court to require the lender to accept the actual value of the vehicle rather than the original loan amount in cases in which the loan balance exceeds the value of the vehicle. Though debtors can ask the bankruptcy court to impose this requirement on the lender, not all trustees will do so. Debtors who are in bankruptcy and want to obtain a title for a vehicle without paying the full outstanding loan should consult a qualified bankruptcy attorney before making this request.
The process of obtaining a vehicle title during bankruptcy can vary considerably based on the debtor’s specific situation, the amount of the outstanding debt and even the court trustee. The ability of a debtor to obtain a car title during a Chapter 13 bankruptcy may also depend on whether the debtor chose to redeem the full value of the loan at 100 percent repayment or force the lender to accept a reduced amount through a process known as a car loan “cram-down.” Borrowers in a Chapter 7 case should carefully document the source of the funds used to pay off the car and obtain the title, as the court may insist on distributing those funds to other lenders without proof that the funds came from sale of the vehicle. In addition, borrowers should exercise caution when selling a financed vehicle while in bankruptcy, as the borrower may not be able to finance another vehicle until after the bankruptcy becomes discharged. In most cases, debtors should consult a qualified bankruptcy attorney when requesting modifications to any portion of a bankruptcy agreement.
Keith Evans has been writing professionally since 1994 and now works from his office outside of Orlando. He has written for various print and online publications and wrote the book, "Appearances: The Art of Class." Evans holds a Bachelor of Arts in organizational communication from Rollins College and is pursuing a Master of Business Administration in strategic leadership from Andrew Jackson University.