When you file Chapter 7 bankruptcy, whether you can keep a luxury car depends on a number of factors. If you have lots of equity in your car, its possible the trustee will be able to sell it and use the proceeds to repay your unsecured creditors. If your equity is covered by an exemption, you can keep it if the court finds that you need the car and that payment is reasonable. You'll have to continue with your payments though.
If your luxury car is paid in full, you can keep it in Chapter 7 bankruptcy if you can exempt it's market value. If you can't exempt its value, the bankruptcy trustee may sell it and use the proceeds to repay your unsecured creditors. (To learn more about how exemptions work and how they allow you to keep property, see our Bankruptcy Exemptions area.)
Both state and federal laws provide exemptions for certain types of property. Which exemptions you can use depend on where you live. (To learn more, see Which Exemptions Can You Use in Bankruptcy?.) The federal exemptions and many state exemptions schemes have an exemption specific to cars and other vehicles up to a certain dollar amount. Many also have a wildcard exemption that you can use for any personal property.
If you have a luxury car, chances are its market value is high, which means your available exemptions may not be enough to protect it. If you cannot exempt the entire value, you will have to pay to the trustee an amount equal to the nonexempt value if you want to keep the car.
Example. John has a luxury SUV that he bought when times were better. The car is paid for and the fair market value is $25,000. John is only able to exempt $6,000 of that value with his state's exemptions. If he wants to keep his car, he will need to pay the trustee $19,000. Otherwise, he will have to give up the car. If that happens, the trustee will pay him his $6,000 exemption and use the rest to repay John's unsecured creditors.
If you're still paying on your luxury car, you will only be able to keep it if you have the money to redeem it (pay the full market value of the vehicle in one lump sum) or if you can reaffirm the debt (agree to repay the loan according to your original loan agreement). (To learn more, see Options to Keep Your Car in Chapter 7 Bankruptcy.)
Redemption is typically impractical with a luxury car, because not only must you pay the car loan lender an amount equal to the market value of the car, but you must also be able to exempt the funds, plus exempt the vehicle's full value. Reaffirmation is a more likely choice.
To reaffirm your car loan, you must be able to show that you need the car and that your car payment is reasonable. If the court finds that you could obtain a different vehicle with a lower payment and the same utility, it will likely deny your reaffirmation of the luxury car. The idea is that if you can afford a luxury vehicle, you can afford to pay back some of your debt.
Of course, if, despite your car loan, you still have lots of equity in the car, the trustee may choose to sell the car to repay your unsecured creditors. While it is uncommon for trustees to sell cars with liens on them, if the equity beyond the loan balance and the exemption is substantial enough to provide value to the estate, the trustee will demand turnover. In that situation, you can keep the car if you can pay to the trustee an amount equal to the nonexempt equity in the car, and if you reaffirm the loan.
Example 1. Linda has a luxury sedan with a $600 per month payment. She needs a four-seater, because she has three children. She only has one year of payments left. Although her payment is high, the court may rule that because the loan will be paid off in one year, Linda would ultimately pay less than she would if she bought a cheaper car. However, the court may also rule that $600 per month is too high, and she can find a sedan costing less on a monthly basis.
Example 2. Chris has a luxury coupe. His wife, Jill, has a mid-priced sedan. They have one child. Chris's car payment is $700 per month. The court would likely rule that the expense is unnecessary and unreasonable, as having a luxury coupe is not required for family purposes and the payment is too high.