If you own two cars and file for Chapter 13 bankruptcy, whether you can keep both cars will depend on a number of factors, including how much equity you have in the cars, how high the car payments are, and whether both cars are reasonable and necessary to the fulfillment of your Chapter 13 plan.
(To learn more about what happens to cars in Chapter 13, including how to reduce your car loan and pay back car loan arrears, see Your Car in Chapter 13 Bankruptcy.)
If You Own Two Cars Outright
If you have a significant amount of equity in your cars, you may not be able to pay enough into your Chapter 13 plan to keep them both. Here's how it works.
Any property you own is part of the bankruptcy estate when you file bankruptcy. You can use exemptions to take property out of the bankruptcy estate. Any value not covered by exemptions is estate property. In a Chapter 13 case, if you have nonexempt property, your unsecured creditors must receive at least the value of your nonexempt property through the bankruptcy. (For details, see Unsecured Debt in Chapter 13: How Much Must Yo Pay?)
Example. If you own $50,000 worth of property, including cars and houses after deducting car loans and mortgages, and you are able to exempt $40,000 of that value, your general unsecured creditors must receive at least $10,000 over the life of your plan.
Your Chapter 13 plan payment must be high enough to pay the trustee fee, your attorney's fee, all your secured and priority creditor,s and this nonexempt equity. If you own two cars and you are able to exempt all their equity, you can keep them. If you cannot exempt all the equity, you must have enough income to pay the nonexempt equity into the plan.
Example. John is unmarried and has two cars, a sedan worth $3,000 and a sports car worth $15,000. He does not owe any money on either car. He is allowed to exempt up to $3,450 in one motor vehicle. He applies the exemption to the sports car, leaving non-exempt equity of $11,550 in the sports car and $3,000 in the sedan. To keep both cars, he will have to pay enough into his Chapter 13 plan to provide $14,550 to general unsecured creditors.
If You Owe Money on the Two Cars
If you owe money on your cars, whether you can keep both depends on whether you need both vehicles and whether the payments are reasonable. Your Chapter 13 plan payment must bebva "good faith effort" -- you must commit to the plan all disposable income you have available after paying your reasonable and necessary expenses, such as rent, food, medical care, and transportation. (For details, see The "Best Effort" Requirement in Chapter 13.)
If you have two car payments, the trustee or a creditor may object to the plan, because having an extra car payment means you have less money to commit to the plan. You will have to prove that you need both cars. Additionally, the car payments must be reasonable.
Example. John has two car payments, because he is married and he and his wife each drive their own cars to work. Each car payment is below $300. If John files Chapter 13 bankruptcy, the court will likely find these car payments reasonable and necessary, because John and his wife need their cars to go to work which is how they will earn income to fund their plan, and because the car payments are not exorbitant.
Example. Larry has two car payments, because he and his wife each have their own cars. Larry's wife is a stay-at-home mother. 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 may require him to surrender the luxury SUV and find a less expensive alternative.
If you owe money on one car and have no payments on the second car, the same rules apply.