Why A Car Lien Can Help You In Bankruptcy
Rare is the case when you should be excited about having a lien on your property. But bankruptcy could be one of those cases. In fact, a lien on your car could be an advantage to you should you file for bankruptcy, no matter which chapter of bankruptcy you should choose.
What is a Lien?
A lien is what secures a lender’s loan to you. Property that is liened can be taken if the money owed to the lender isn’t paid. Typically, cars are liened, as are homes, which is why they can be, and are often, repossessed or foreclosed upon.
Worse, if you don’t pay, and the lien is foreclosed on or repossessed, you could still owe money to the lender. That’s because often the property is sold for less than what you actually owe to the lender. The balance, called a deficiency judgment, becomes a monetary judgment against you (albeit one that can be discharged in bankruptcy).
How a Lien Helps in a Chapter 13 case
In a Chapter 13, owing money on a car can actually help you. This is because Chapter 13 makes you pay back creditors based on your disposable income—the more you have, the more you will pay.
Disposable income means income left over after paying your expenses. The money that you pay on your car loan reduces the amount of disposable income that you have, and thus, lowers the money you will have to pay to creditors.
How a Lien Helps in a Chapter 7 Case
A car loan can help you in a Chapter 7 bankruptcy also. To file for Chapter 7, you will have to show that you pass the means test, a test to see if you make under a certain amount. If you earn too much, you may be forced into a Chapter 13.
The means test takes into account your expenses. Again, a car loan or lien increases your expenses, and thus reduces your earnings for the purposes of the means test. This could make it easier for you to qualify for a Chapter 7 bankruptcy, in the event you otherwise would earn too much money.
Exempting Your Car is Easier
The lien has another benefit in a chapter 7: It reduces your equity in the car, making it easier for you to exempt it. This is because the value of your car isn’t what it’s worth on the open market, it’s how much equity that you have in the car.
If you had a $50,000 car, but the car had a loan or lien on it that was $49,000, you actually only have $1,000 in equity. You would be able to exempt, and thus keep, the vehicle entirely, all because of the loan or lien.