In 2011, the United States Supreme Court decided a case that continues to have a big impact on people who intend to file Chapter 13 bankruptcy. The case stems from a 2006 Chapter 13 bankruptcy case in which a debtor named Jason Ransom and his Chapter 13 bankruptcy lawyer challenged the means test. It did not allow him to claim a vehicle deduction since he owned his car outright.
The court ruled in favor of the creditor MNBA in this case. That means Ransom and future filers of Chapter 13 bankruptcy who own their cars cannot count an exemption against the amount of disposable income available to pay creditors. However, debtors who do have a current auto loan can deduct the amount under the means test since the amount that must go towards the car payment is not available to repay creditors.
The Exemption Law Before the Supreme Court Decision
This decision was necessary because some circuit courts allowed Chapter 13 bankruptcy filers to take the vehicle exemption if they owned their car outright and some did not. At the time, the 11th Circuit Court of Appeals for the Atlanta, Georgia area had not formally ruled on this specific issue. Because of the Supreme Court decision, people who wish to work with a Chapter 13 attorney to file bankruptcy have an additional consideration when determining how much they can afford to pay creditors each month. Those who qualify to file Chapter 7 bankruptcy may choose that option to avoid this situation.
Chapter 13 Bankruptcy and Vehicle Ownership in Georgia
Georgia law allows creditors to change your loan terms in certain situations if you file for Chapter 13 bankruptcy protection and wish to keep your vehicle. However, no agreement formally reaffirming the loan agreement is necessary as it is with Chapter 7 bankruptcy. As your Chapter 13 bankruptcy attorney will explain, you can request to pay fair market value for the vehicle with a reasonable interest rate if you took out a loan for it more than 910 days before completing a bankruptcy petition. The court considers reasonable interest the current prime rate with two percent added to it.
If you bought your car or truck less than 910 days before filing for Chapter 13 bankruptcy, the law still allows you to request a lower interest rate that meets the definition of reasonable as described above. You would not make a separate payment to your auto lender after a judge approves your repayment plan since you make one lump sum payment each month that the court distributes.
With a Chapter 7 bankruptcy, you would need to work with your creditor and sign a document called a reaffirmation agreement under the same loan terns you originally agreed to when buying the vehicle. That means choosing Chapter 13 bankruptcy over Chapter 7 bankruptcy can actually work in your favor. Specific circumstances when this would apply include if you purchased your vehicle more than 910 days ago at a high interest rate, you currently owe more than the car is worth, or your monthly car payment is unaffordable.
To learn more about Chapter 13 bankruptcy and whether it’s the right option for you, please contact us to request a free evaluation.