Whether you can keep a luxury car in Chapter 13 bankruptcy depends on several factors.
- Will the court find your car payment to be a reasonable and necessary expense?
- If you have nonexempt equity in your luxury car, can you pay that amount to your unsecured creditors over the life of your Chapter 13 plan?
Read on to learn more. (For more on what happens to cars in Chapter 13, including reducing your car loan and making up car loan arrears through your plan, see Your Car in Chapter 13 Bankruptcy.)
Is Your Luxury Car Payment a Reasonable and Necessary Expense?
Bankruptcy law requires that individuals in Chapter 13 bankruptcy use their best effort to repay creditors in the Chapter 13 plan. This means that when you file Chapter 13, you must commit all your disposable income to the plan. Disposable income is what you have left over after you pay your reasonable and necessary expenses. Reasonable and necessary expenses include housing, utilities, transportation, food, medical care, educational expenses, taxes, and any other expenses you must pay to adequately support yourself and your dependents. (For details, see The "Best Effort" Requirement in Chapter 13 Bankruptcy.)
What is a necessary car expense? Your car payment is a necessary expense if you need your car to drive to work, take your children to school, transport dependent family members to medical appointments, buy food, or for any other non-frivolous purpose.
Is your luxury car payment reasonable? Whether your car payment is reasonable is ultimately up to the court, and there is no set standard, but typically a payment over $400 will bring an objection from the trustee or from creditors. If your car payment is too high, the trustee or a creditor may argue that if you had a lower car payment, you could pay more into your Chapter 13. If you have a luxury car and you owe money on it, the trustee is likely to object on the grounds that the car payment is not a reasonable and necessary expense, because a cheaper car would serve the same purpose while allowing you to pay more into your Chapter 13 plan.
The bottom line is that if you owe money on a luxury car, you will likely face objections from the trustee or other creditors. You can overcome these objections by proving to the court that the car payment is reasonable and necessary for the maintenance and support of yourself and your dependents.
If You Have Significant Equity in Your Luxury Car
If you have a significant amount of car equity in your luxury car, there's another issue that might arise in your Chapter 13 case. In a Chapter 13 case, your general unsecured creditors must receive at least what they would have received if you had filed Chapter 7. Therefore, they must receive at least the value of your nonexempt assets. (For details on this requirement see Unsecured Debt in Chapter 13: How Much Must You Pay?.)
Luxury cars typically have a high value, and if you cannot exempt the full value, you will have to pay enough into your Chapter 13 plan to provide the nonexempt value to unsecured creditors.
Example. If you have a Porsche worth $80,000 and your exemptions only allow you to protect $4,000 in car equity, you have nonexempt equity of $76,000. Your plan payment would have to be high enough to provide for all your priority and secured creditors, and also pay $76,000 to your general unsecured creditors over the life of the plan.
If your disposable income is sufficient to pay a luxury car's nonexempt equity to general unsecured creditors, you can keep the car. If paying that much makes your plan infeasible, you may need to sell the car.
If you've got a lot of debt and valuable property, you want to learn more about Chapter 13 bankruptcy.