Arkansas residents have a choice of using state or federal bankruptcy exemptions to protect one car, van, SUV, truck, motorcycle, or other vehicle during Chapter 7 bankruptcy. There is a big difference between these two laws. The federal motor vehicle exemption allows a debtor to exempt up to $3,675 in car equity. The Arkansas state exemption protects only $200 in all of your personal property, including cars and other vehicles.
Read on to learn more about using exemptions to protect car equity, including increased exemption amounts for married couples, covering additional equity with the wildcard exemption, and more.
(For more information about exemptions, including how they work and which ones you can use, see our Bankruptcy Exemptions area. For information specific to the motor vehicle exemption, see our Motor Vehicle Exemption in Bankruptcy area.)
Arkansas residents who file bankruptcy can select from either the federal bankruptcy exemptions or the Arkansas state exemptions (not both).
Federal motor vehicle exemption. The federal motor vehicle exemption amount changes ever three years. To find the current amount, see The Federal Bankruptcy Exemptions.
Arkansas personal property exemption. While Arkansas does have a bankruptcy exemption for motor vehicles on the books, the Eight Circuit Court of Appeals has declared it unconstitutional. Instead, said the Eighth Circuit (and other Arkansas bankruptcy courts), the amount of personal property that bankruptcy filers can keep is capped by a provision in the Arkansas constitution. In re Holt, 894 F.2d 1005 (8th Cir. 1990); In re Kelley, 455 B.R. 710 (Bankr. E.D. Ark. 2011). That provision says that you can keep up to $200 of your personal property if you are single, and $500 if you are married. Ark. Const. art. IX, § 1 , § 2. These caps apply to all of your personal property combined. So if you are single and apply $200 of that exemption to your car, you won't have anything left for other personal property items.
Arkansas residents can apply the Arkansas state or federal motor vehicle exemption to protect equity in one vehicle. If the equity in your car is less than the motor vehicle exemption, then the trustee cannot sell it. If the equity in your car is significantly more than the applicable exemption amount, the trustee is likely to sell your car to repay your unsecured creditors. For details, see The Motor Vehicle Exemption: Can You Keep Your Car in Chapter 7 Bankruptcy?
Keep in mind that even if your car is safe from the bankruptcy trustee, the lender may be able to repossess your car during or after bankruptcy. To learn more, see Your Car in Chapter 7 Bankruptcy and If You Are Behind on Your Car Payments, Can Chapter 7 Help?
Vehicle equity is the fair market value minus the amount of money owed on the vehicle. For instance, if your car is worth $5,000 and your loan on that vehicle is $4,000, your equity is $1,000.
Your equity may be reduced by judgment liens or by co-owners. For example, if you and your mother own a vehicle jointly that has $2,000 in total equity, your share of the vehicle’s equity is only $1,000.
If you and your spouse both own the motor vehicle, you can apply your individual Arkansas pesonal property or federal motor vehicle exemption to protect the vehicle’s equity. That is a maximum of $7,350 under the federal exemptions, or $1,000 if you elect to use Arkansas' state exemptions.
(To learn about the advantages and disadvantages of joint bankruptcy filings, see Nolo's section on Bankruptcy Options for Married Couples).
Selecting the federal exemption laws can work to your advantage here. Depending on whether or not you use the federal homestead exemption, the wildcard can be quite large. To find the current amount, see The Federal Bankruptcy Exemptions.
The federal exemptions allow you to use one motor vehicle exemption for one vehicle per person. The unused portion of your homestead equity can be applied to a different vehicle. If you and your spouse file a joint bankruptcy, each of you can apply your individual motor vehicle exemption and homestead exemption to protect up to four vehicles.