Can I Keep Two Cars in Chapter 13 Bankruptcy?

You can keep two cars in Chapter 13 bankruptcy, but you'll need to be prepared to show that you can pay creditors for any vehicle equity that isn't covered by a bankruptcy exemption. And, if you're making two car payments (or even one), you'll have to prove that you need both vehicles to earn income to fund the plan and that the payment amounts are reasonable.

(Learn about reducing a car loan and paying back payment arrearages in Your Car in Chapter 13 Bankruptcy.)

Bankruptcy Exemptions Protect Car Equity

Unlike a Chapter 7 bankruptcy case, you won't give up property when filing for Chapter 13 bankruptcy—you'll pay for it, instead. Here's how it works.

In both Chapter 7 and Chapter 13 bankruptcy, you're allowed to protect a certain amount of property using bankruptcy exemptions. Each state decides the type and amount of property its residents need to maintain employment and a household.

Almost all states provide some allowance for a vehicle, but the specifics vary. For instance, in some states, you can protect a particular amount of equity in one car, while others allow you to use the exemption amount on multiple vehicles. A few states let a filer keep any single car, regardless of value. (Find out more in Bankruptcy Exemptions by State.)

If your car is valuable, the bankruptcy exemption might not fully cover the equity. In that case, you must pay for any "nonexempt" equity in the Chapter 13 repayment plan if you wish to keep it. Here's how the nonexempt equity rule gets applied in both Chapter 7 and Chapter 13 bankruptcy:

• Chapter 7 bankruptcy. The trustee sells the nonexempt property and forwards the funds to the creditors.
• Chapter 13 bankruptcy. The trustee doesn't sell the property. Instead, you pay for the nonexempt portion and the trustee forwards the funds to the creditors.

In both instances, unsecured creditors receive the same amount regardless of whether the filer is in Chapter 7 or Chapter 13 bankruptcy. (For details, see Unsecured Debt in Chapter 13: How Much Must You Pay?)

How to Calculate Car Equity

Equity is the value of an item minus any loan balance and costs of sale that the seller must pay. It's the amount that the seller will get to keep after completing the sale.

Example. After spending $100 in advertising costs, Max sold his car for $15,000. Because he owned the car outright (he didn't have an auto loan to pay off) his equity totaled $14,900 ($15,000 sales price - $100 fees = $14,900 in equity).

Many people must borrow money when buying a car. As a part of the transaction, the borrower must agree to give the lender a lien on the purchased property, which is a security interest (a type of ownership) in the car until the borrower pays off the loan. If the borrower fails to make the monthly payment, the lien allows the lender to recover the car, sell it at auction, and use the sales proceeds to pay down the debt. The lien also prevents a borrower from transferring title to a new owner without first paying off the car loan.

Example. Lori's car sold for $25,000. When she sold it, she owed the bank $13,000. She also paid $2,000 in sales costs. After paying off the car loan and sales costs, she was left with the equity of $10,000. ($25,000 sales price - $15,000 car loan and sales costs = $10,000 in equity).

It's important to note that when you complete the official bankruptcy forms, you'll list the current value of the property (the price that you'd expect a buyer to pay). You'll also list any outstanding loans on the property (secured debt). You won't, however, factor in sales costs. (For more information, see Completing the Bankruptcy Forms.)

Other Amounts You Must Pay in a Chapter 13 Repayment Plan

When you propose your plan, you must have enough income to pay all required amounts, including monthly living expenses, your mortgage and car payment (plus arrearages), and other nondischargeable debts, such as certain taxes and domestic support arrearages (these must be paid in full). Any funds remaining after paying these amounts—called disposable income—is divided amongst all remaining creditors holding unsecured debt.

(Learn what you're required to pay in The Chapter 13 Repayment Plan.)

When You Own Two Cars Outright

You can keep two cars as long as:

• you can use a bankruptcy exemption to protect all of the equity in both cars, or
• you have enough income to pay for any nonexempt equity (equity not covered by an exemption), plus all other required payments.

Example. John has two cars—a sedan worth $3,000 and a sports car worth $15,000. He doesn't own each car outright. His state bankruptcy exemption allows him to exempt up to $3,450 in one motor vehicle. He applies the exemption to the sports car, leaving nonexempt equity of $11,550 in the sports car and $3,000 in the sedan. He will be able to keep both cars if he can pay at least $14,550 to general unsecured creditors through the repayment plan.

When You Have a Car Payment (or Two)

Keeping two cars while making payments on both can be challenging. You could find yourself running up against the "good faith effort" rule that requires repaying creditors using all disposable income available after paying reasonable and necessary expenses, such as rent, food, medical care, and transportation. (For details, see The "Best Effort" Requirement in Chapter 13.)

The trustee (or a creditor) will object to your plan if the extra car payment means less money for other creditors. You, in turn, will need to demonstrate that you need both cars and that therefore, it's reasonable to pay for each—and the actual payment amount must be reasonable, too.

Example 1. John and his wife drive separate cars to work, and the car payments are below $300 each. If John files for Chapter 13 bankruptcy, the court will likely find the car payments reasonable and necessary, because John and his wife need two cars to earn the income required to fund the plan and the car payments aren't excessive.

Example 2. Larry has two car payments; however, his partner doesn't work. One car payment is $300; the other car payment is $700 because the vehicle is a luxury SUV. Larry bought the luxury SUV because he has three minor children, and his wife needs a large vehicle to transport the family. Larry will likely be able to keep the $300 per month car, but the court might require him to surrender the luxury SUV and find a less expensive alternative.