For those clients with car loans most vehicles are under secured and no exemptions are needed and if there is some equity there are more than enough exemptions to cover same. In most cases this holds true whether they rent or own their homes. For individual homeowners with equity in excess of $22,975 or joint homeowners in excess of $45,950 who wish to retain their homes they have to use the Connecticut exemptions which provides an exemption up to $75,000 for the equity in their homes. Unfortunately the motor vehicle exemption is only $3,500 with a wild card exemption of only $1,000. They are instances when faced with this situation and a client who owns a car with a value in excess of the $3,500 to $4,500 filing bankruptcy puts the car's equity at risk. When it's close I have had clients file and negotiate a buy out of the difference above the exemption with the trustee. With cars that have more significant value this may not be an option.
The second issue concerning the retention of your motor vehicle has to do with the reaffirmation of auto loans. In 2005 the Bankruptcy Code was amended in an attempt to remove what is known as the "ride through" or "retain and pay" option with regard to car loans in bankruptcy. Per the amended code your options were limited to surrendering your vehicle or retaining via redemption(payoff) or reaffirmation as listed on a form entitled "Statement of Intention" to be filed with the court for service on your creditors with your Chapter 7 bankruptcy filing. I have yet to meet with a bankruptcy client who is in a position to redeem their vehicle. For those who want to retain their vehicles the issue of reaffirmation usually must be addressed. In simple terms when a reaffirmation agreement is signed by the debtor and lender it is filed with court and the auto loan debt is not discharged by the bankruptcy and is paid and reported on debtor's credit report as if no bankruptcy were filed. For auto loans other than those from credit unions the reaffirmation agreement form requires that the debtor's attorney to sign off that the reaffirmation agreement does not impose an undue hardship on the debtor. In most cases this is not possible due to the fact the secured debt exceeds the value of the vehicle and/or the debtors' current income and expenses. In recognition of this dilemma the
legislature in 2009 came to the rescue with a revision of CGS section 36a-785
clearly stating the filing of a Chapter 7 by itself does not constitute a
default of an auto loan allowing a lender to repossess a secured vehicle. The
practical effect of this revision was to take the teeth out of the 2005 code
amendment and allow for the continuance of the “retain and pay” option without
reaffirmation of car loans in Connecticut .
This fact seems to have been acknowledged by all auto lenders who have been
educated about this state statute by the bankruptcy attorneys in this state.
Therefore, in practically all my cases my clients keep their cars with the
debts discharged and have the option to continue to pay their car loans and
keep their cars. If their loans become too difficult to pay in the future or
their cars break down they can stop paying and let the lender take back their
cars without any liability for the loan balance due. At this point this post is
already longer than I intended and I will leave the issue of leased cars in
bankruptcy which is less cut and dry for a future post to my blog. Connecticut