Eligibility for Filing for Chapter 7 Bankruptcy
Debtors who don’t have enough income to pay something to unsecured creditors (credit cards, medical bills, etc.) are able to file for a Chapter 7 Bankruptcy. Debtors will qualify if they pass the means test.
How a Car Payment May Help You Qualify
Typically, a payment for a car loan will help you pass the means test by reducing your disposable income. The Court uses a standard vehicle ownership deduction, which changes from time to time. Debtors may use the actual car payment if it is in excess of the standard deduction if it is reasonable and necessary. The Bankruptcy Court will likely question the necessity of the auto loan payment if it is much higher than the standard deduction.
How the Bankruptcy Court Determines if Car Payment are Too High
Filing a Chapter 7 Bankruptcy file right after purchasing an expensive luxury car may lead to an objection by the Bankruptcy Trustee. The Bankruptcy Court Judge will decide the reasonableness of the dispute by analyzing the following: whether the vehicle is the family’s only car, the size of the family, whether the car is used for work purposes of a family member, interest rates, etc.
Entering Into a New Car Loan Payment Contract (Reaffirmation)
A significant car payment may impact whether you are able to keep the vehicle and continue to make payments after your case is discharged by the Court. Typically, debtors would need to enter into a reaffirmation agreement and the payments per the reaffirmation agreement will be paid after the bankruptcy case closes. If you do not make the payments, the lender may repossess the vehicle.
The Court will only agree to a reaffirmation agreement if debtors can actually afford the loan payments. Debtors must prove that they have enough funds left over to cover the loan payments. If the reaffirmation demonstrates that debtors cannot afford the car payments, the Court will set a hearing, so that the Court may question debtors directly to determine if the reaffirmation is necessary.