Can I Keep My Car If I File Chapter 11?
Understand how to retain your vehicle when filing Chapter 11 bankruptcy. Get insights into integrating your car into the reorganization plan.
Chapter 11 bankruptcy offers individuals and businesses a path to financial reorganization, to resolve debt issues while allowing operations to continue. A common concern is retaining significant assets, such as vehicles, essential for daily life or business. Keeping a car during Chapter 11 is possible, but depends on how the vehicle and its debt are addressed in the bankruptcy plan.
Understanding Car Retention in Chapter 11
Upon filing Chapter 11, a debtor’s vehicle becomes subject to court jurisdiction. Unlike Chapter 7, which involves liquidation, Chapter 11’s purpose is reorganization, allowing debtors to retain necessary assets.
The “automatic stay” immediately goes into effect upon filing. This injunction prevents creditors, including car lenders, from repossessing a vehicle. While the automatic stay provides immediate, temporary relief, long-term retention requires its treatment to be outlined and approved within the reorganization plan.
Secured creditors are entitled to “adequate protection” for their collateral during bankruptcy proceedings. This protection addresses any potential decrease in vehicle value while the case is ongoing. Adequate protection can involve periodic cash payments for depreciation, additional liens on other property, or other relief ensuring the creditor’s interest is safeguarded. These payments are required until the reorganization plan is confirmed by the court.
Addressing Vehicle Loans in the Reorganization Plan
The reorganization plan must detail how secured creditors, like vehicle lenders, will be treated, often involving precise vehicle valuation. The car’s value determines the secured portion of the debt. Debtors use valuation guides (NADA Guide or Kelley Blue Book) or professional appraisals to establish the vehicle’s fair market value at filing. This valuation helps ascertain if the loan balance exceeds the vehicle’s worth, known as “underwater.”
If the vehicle’s value is less than the outstanding loan balance, the debtor may utilize a “cramdown” provision. This allows the loan principal to be reduced to the vehicle’s fair market value, reclassifying the remaining balance as an unsecured claim. For instance, if a car is worth $10,000 but has a $20,000 loan, the secured portion becomes $10,000; the remaining $10,000 is treated as unsecured debt. This unsecured portion receives little to no payment under the plan, significantly reducing the total amount owed.
Alternatively, debtors can assume the existing loan or lease agreement, continuing payments under original terms. If original terms are unfavorable, Chapter 11 allows for modification of loan terms, such as reducing the interest rate or extending the payment period, provided the treatment is fair to the creditor and feasible for the debtor. These modifications make payments more manageable, enabling the debtor to retain the vehicle while completing the reorganization plan. The proposed treatment for vehicle debt must be clearly articulated in the plan, ensuring all parties understand their rights and obligations.
Steps for Including Your Vehicle in the Plan
After determining the vehicle loan’s proposed treatment, the next step involves incorporating it into the Chapter 11 reorganization plan. The debtor, with legal counsel, drafts the plan, classifying claims, specifying their treatment, and outlining its execution. This document must include a disclosure statement providing creditors sufficient information to vote on the plan. The debtor has 120 days to propose a plan, which can be extended by the court.
Once drafted, the plan and disclosure statement are filed with the bankruptcy court, and notice is provided to all creditors. Creditors whose rights are affected (“impaired”) vote on the plan. For confirmation, a class of creditors accepts the plan if two-thirds in amount and more than half in number vote in favor. Following the voting period, a confirmation hearing reviews the plan for feasibility, fairness, and compliance with bankruptcy laws.
If a class of creditors objects, the court may still confirm it through a “cramdown” if the plan is fair, equitable, and does not discriminate unfairly among similar creditors. After the plan is confirmed, it becomes legally binding on all parties, and the debtor must adhere to its payment schedule and terms. Ongoing compliance with the confirmed plan, including timely payments to the car lender, is necessary for successful completion of the Chapter 11 case. If a lender fails to comply with the confirmed plan, the debtor may need to file a motion to compel compliance.