In a Chapter 7 bankruptcy, the trustee has the power to take your car and sell it if you cannot exempt its full value. However, even if you can't exempt the full value, you may get to keep your car if the bankruptcy trustee decides to abandon (not liquidate) it. Read on to learn more about why and under what circumstances the trustee may abandon your car.
Your Car Becomes Property of the Estate When You File for Bankruptcy
When you file for Chapter 7 bankruptcy, almost all of your property, including your car, becomes property of the bankruptcy estate. A bankruptcy trustee is appointed and given the authority to take nonexempt assets and sell them to pay your creditors.
You are allowed to keep any property you can fully exempt. Most states have a motor vehicle or wildcard exemption you can use to exempt all or a portion of your car’s value (exemption amounts vary from state to state). However, even if you can’t fully exempt your car, you may still be able to keep it if the trustee decides to abandon it.
To learn more about the motor vehicle exemption and to find the motor vehicle exemption amounts in your state, see The Motor Vehicle Exemption in Bankruptcy.
What Is Abandonment?
If the bankruptcy trustee abandons an asset, it means he or she will not liquidate it. A trustee will abandon an asset if it has little or no value to the bankruptcy estate. So if selling your car won’t generate enough money to pay your unsecured creditors, the trustee will likely abandon it. The trustee can abandon your car by filing a “notice of abandonment” with the court or it will simply be deemed abandoned if the trustee has not administered it by the time the case is closed.
Will the Trustee Abandon Your Car?
Whether the trustee will abandon your car depends on its value, how much you can exempt, and if you have a car loan. Below, we discuss the circumstances that may lead the trustee to abandon your car.
You Can Exempt Most of the Car’s Value
The trustee may abandon your car if you can exempt a significant portion of its value even if it is not fully exempt. The trustee must pay you your exemption amount from the proceeds if he or she sells the car. In addition, there are costs associated with storing and selling an asset and the trustee receives a commission as well. So if there will be nothing left over for creditors after deducting your exemption amount, sale costs, and commissions, the trustee will abandon your car.
Example. Let’s say your car is worth $5,500 and you don't owe anything on it. Your state has a $5,000 motor vehicle exemption so you can only exempt $5,000 of the vehicle’s value. The nonexempt $500 would probably get used up by sale costs and trustee commissions so the trustee will likely abandon your car.
You Have Little or No Equity in the Car
Your lender’s security interest in your car (its right to take the car to satisfy the loan if you default) normally remains unaffected by bankruptcy (although the lender must still get court permission to repossess if you are in an active bankruptcy). This means that the trustee has to pay off the car loan first before paying unsecured creditors with the proceeds if he or she sells the car. So the trustee is only interested in your car if it is worth more than the balance of your loan. If you have little or no equity, the trustee will likely abandon your car. But keep in mind that even if the trustee abandons your car, you must continue making payments if you don't want the lender to repossess it.
Example. Let’s assume your state offers no exemptions for your car. If your car is worth $20,000 but you have a $19,500 car loan, you have $500 in nonexempt equity that the trustee may be interested in. However, like the example above, this amount will likely be used up in paying sale costs and commissions so the trustee will probably still abandon your car.
To learn more about cars, car loans, and your options for dealing with these in Chapter 7, see the articles in Your Car in Chapter 7 Bankruptcy.