The motor vehicle exemption helps determine whether you can keep your car, truck, motorcycle, van, or other automobile in Chapter 7 bankruptcy. To determine if you can keep your vehicle in Chapter 7 bankruptcy, you calculate the equity in your car and compare that number to the applicable motor vehicle exemption.
Read on to learn how motor vehicle (and other) exemptions protect your car, how to determine if your car equity is protected, and additional steps you must take to keep your lender from repossessing your car.
CAUTION: This article assumes you own your car free and clear, or are current on your car payments. If you are behind on your car loan, you cannot keep your car even if the equity is exempt, unless you work out something with the car lender.
The Role of Exemptions in Chapter 7 Bankruptcy
Chapter 7 bankruptcy wipes out most debts. In return you must give up certain property so that the trustee can sell it and use the proceeds to repay your unsecured creditors. You don’t have to give up all of your property, however. Bankruptcy law protects certain items of property – these laws are called exemptions. If the equity in an item of property is exempt, the trustee cannot take it. Many Chapter 7 filers are able to exempt most or all of their property. (To learn more about exemptions and how they work, see our Bankruptcy Exemptions area.)
How Much Equity Do You Have in Your Car?
The first step is to figure out how much equity you have in your car, if any.
Your Equity If You Don’t Have a Car Loan
If you own your car free and clear (that is, you don’t have a car loan), the equity in your car is the car’s replacement value – that is, what you can currently sell your car for given its age and condition. You can find the replacement value (also called market value) of your car on websites such as Kelley Blue Book at www.kbb.com or the National Auto Dealers Association at www.nada.com.
Your Equity If You Have a Car Loan
If you have a car loan, your equity in the car is the replacement value of your car minus the amount left on the loan.
If you have zero or negative equity. If you get zero or a negative number, which is not uncommon with car loans, you have no equity. In this situation, the amount of your car exemption is irrelevant, since there is no equity to protect. The trustee will not be able to sell your car. The car loan lender, however, can repossess your car unless you take further action. (See “If Your Car Is Exempt: Further Steps to Keep Your Car,” below.)
If you have positive equity. If you get a positive number, that’s the amount of equity you have in your car. You must compare your equity to any exemption amounts to find out if the trustee can take your car or not.
Compare Your Car Equity to the Applicable Motor Vehicle Exemption
Each state has a set of exemptions that can be used in bankruptcy. Most states allow bankruptcy filers to protect some equity in a car or other motor vehicle. The amounts vary widely, however. Some states allow bankruptcy filers to use the federal bankruptcy exemptions instead of the state exemptions. The federal bankruptcy exemptions allow you to exempt up to $3,675 of equity in your car.
Once you find the applicable motor vehicle exemption in your case, compare it to your equity. If the exemption covers all of your equity, the trustee cannot sell your car. If you have lots of unprotected equity, the trustee is likely to sell your car (although you may be able to keep your car by paying the trustee the nonexempt amount). If a small amount of equity is nonexempt, you still may be able to keep your car (see “Will the Trustee ‘Abandon’ Your Car?,” below).
Here’s an example of how this works.
Example. Joe lives in Arizona. He owns a 2007 Toyota Corolla worth $7,000. He still owes $5,000 on his car note. Arizona allows debtors to exempt up to $5,000 in equity. The trustee cannot sell Joe’s car in Chapter 7 bankruptcy because the $5,000 motor vehicle exemption is enough to protect all of his car equity (car equity is $7,000 – $5,000 = $2,000).
Using Wildcard Exemptions to Protect Your Car
If the applicable motor vehicle exemption does not cover all the equity in your car, you may be able to use other exemptions to protect your car. Many states have a wildcard exemption which you can apply to any type of property. Other states allow you to apply any unused portion of the homestead exemption to other property. (To learn more, see The Wildcard Exemption in Bankruptcy.) You can add these exemptions to your motor vehicle exemption to protect your car equity.
Example. Sue lives in Connecticut and has $2,000 in equity in her car. Connecticut allows debtors to exempt up to $1,500 in a car. It also has a $1,000 wildcard exemption. Sue can protect her car by using $1,500 of Connecticut’s motor vehicle exemption and $500 of the wildcard exemption.
Will the Trustee "Abandon" Your Car?
If the equity in your car is over the exemption amount, but not by much, you still may be able to keep your car. Here’s why.
In order to use the car equity to repay your creditors, the bankruptcy trustee must sell the car at auction. The trustee will also earn a commission from the sale of the car. From the sale proceeds the trustee must: (1) pay off the car loan; (2) pay you the amount of your exemption; (3) deduct the costs of sale; and (4) deduct the trustee’s commission.
If, after all of these costs and deductions there is little or nothing left over for your unsecured creditors, the trustee is unlikely to sell the car. In this situation, the trustee will “abandon” the car, which means you get to keep it.
If Your Car Is Exempt: Further Steps to Keep Your Car
If you determine that the trustee will not sell your car to pay your creditors, you still have one more step to take if you have a car loan (if you don’t have a loan, you are done). Even though the car is protected from the trustee, the lender can still repossess the car unless you continue to make your car payments and either (1) redeem the car (pay the market value of the car to the lender) or (2) reaffirm the car loan (sign a new loan that will remain in force after the bankruptcy is over). To learn more about these options, see Your Car in Chapter 7 Bankruptcy.