You can calculate whether you’ll lose your vehicle in Chapter 7 bankruptcy if you know your state’s motor vehicle exemption amount, the car’s value, and the amount owed on a vehicle loan. The motor vehicle exemption protects your car, truck, motorcycle, or van equity.
However, the exemption amount must fully cover the vehicle’s equity. If it doesn't, the bankruptcy trustee responsible for managing your case can take your car in Chapter 7.
But that’s not the only qualification you must meet. You can’t file for bankruptcy on a car loan and keep the car without paying as agreed. If you don't pay the amount owed, the lender can use its lien rights to repossess your vehicle.
You don’t lose everything you own when filing for Chapter 7 bankruptcy. You can keep ”exempt” property needed to maintain employment and a household. Exempt property varies by state, but most people retain household furnishings, a retirement account, some home and car equity, and other necessary items.
So what happens to property you can’t exempt fully?
In Chapter 7, you’ll lose assets you can’t protect with an exemption, known as “nonexempt property.” The Chapter 7 bankruptcy trustee will sell your nonexempt property and distribute the money to creditors. Learn more about protecting property with bankruptcy exemptions.
Follow these four steps to answer the “Can I file bankruptcy and keep my car?” question.
If you own the car outright, your calculations end here. If you have a vehicle loan, you must meet another requirement outlined below in "If You Have a Car Loan When Filing for Chapter 7, You Must Do This."
Your state’s exemption statutes will tell you how much equity you can protect. Look for a motor vehicle exemption and a wildcard exemption that you can use on any property you choose. Some states will let you stack the two exemptions together. However, check the wildcard conditions carefully because some states limit wildcard use.
In your bankruptcy paperwork, you’ll report your vehicle's “fair market value,” or the amount you can sell it for, considering its current age and condition. Check websites such as Kelley Blue Book and the National Auto Dealers Association for values. Your bankruptcy trustee will likely want a printout from one of the sites to prove your vehicle’s value.
You’ll need to take any vehicle loan into account for this step.
If exemptions cover all your equity, you can file for bankruptcy and keep your car—the trustee can’t sell it. However, the trustee can take your car in Chapter 7 if you have nonexempt vehicle equity.
Here’s what the Chapter 7 trustee will do:
Example 1. Kevin owes $5,000 on a “vintage” Corvette worth $7,000. Because his state will let him use the motor vehicle exemption to exempt up to $5,000 of vehicle equity, the Chapter 7 bankruptcy trustee can’t sell Kevin’s car ($7,000 value – $5,000 car note = $2,000 equity). Kevin can file Chapter 7 and keep his car.
Example 2. Sonya owns a Harley worth $15,000, free and clear. But her state’s motor vehicle exemption is $5,350, leaving $9,650 in unprotected equity. The Chapter 7 trustee will sell Sonya’s Harley and, after deducting sales costs, recoup $9,250. The trustee will give Sonya the $5,350 exemption amount, keep the trustee’s sales fee, and distribute the remaining proceeds to Sonya’s creditors. They (the trustee and creditors) will take Sonya’s car in Chapter 7.
Example 3. Hannah has car equity of $4,000 and can exempt up to $3,500 using her state’s motor vehicle exemption. Because her state also has a $1,000 wildcard exemption, Hannah can protect her car by stacking the $3,500 motor vehicle exemption and $500 of the wildcard exemption. Hannah can keep her car if she files for bankruptcy.
Important note. Don't forget, if you have a car loan, you have another step. It's discussed below in "If You Have a Car Loan When Filing for Chapter 7, You Must Do This."
It’s possible if the trustee does one of the following:
Make sure your car payment is current before filing for Chapter 7. You can skip this step if you don’t have a car loan. But if you have a car loan, the following information is crucial.
Suppose you’re behind on your vehicle payments. In that case, the lender can take back the car, even if you’re in bankruptcy, and an exemption protects your equity. Why? Because the car secures the loan.
If you don’t pay as agreed, the lender can use the lien rights to recover the vehicle by doing the following:
If you’re behind on payments, you might have another option—redeeming the car. But it can be costly.
You redeem a vehicle by paying the lender the car’s market value in one lump sum payment, so if you owe more than the car is worth, this can be an excellent way to go. Many ask friends or family for help or use a lender specializing in bankruptcy redemptions.
Many lenders will let you keep a car after bankruptcy as long as you’re current on the payment and continue to make the payment after the case ends. The lender will give you the title when you pay the amount due under the discharged contract.
This arrangement works well because if the car breaks down or is in an accident, the filer can stop making payments and return the vehicle to the lender. However, without a contract in place, the payments aren’t reflected on the filer’s credit report, and the lender can repossess the car at any time.
Filers who don’t want to risk losing the vehicle can sign a new contract called a “reaffirmation agreement.” Although you might be able to convince the lender to agree to better terms, you should assume they’ll remain the same because the lender isn’t obligated to modify the loan. Therefore, while signing a reaffirmation agreement can help you keep a car in Chapter 7 bankruptcy, it isn’t a tool you should rely on if you’re behind on your payments.
Learn more about your car in Chapter 7 bankruptcy.
Did you know Nolo has made the law accessible for over fifty years? It’s true, and we want to ensure you find what you need. Below, you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
|
More Like This |
Surrendering a Car in Chapter 7 Bankruptcy Can the Lender Repossess My Car During Chapter 7 Bankruptcy? |
Consider Before Filing Bankruptcy |
Which Debts Can You Discharge in Chapter 7 Bankruptcy? Can I Run Up My Credit Card Balances Before I File Bankruptcy? Preparing for Bankruptcy: What to Do With Bank Accounts, Automatic Payments, and Utility Deposits |
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>The problem is that Chapter 7 bankruptcy doesn’t provide a way to catch up on overdue car payments the way that Chapter 13 does. However, Chapter 7 bankruptcy can stave off the repossession temporarily, which might give you time to make other arrangements.
(Learn how to catch up on car payments in Chapter 13 bankruptcy.)
If you are behind on your car payments and you file for Chapter 7 bankruptcy, your lender cannot legally repossess your vehicle. When you file for bankruptcy, the automatic stay goes into effect and prevents almost all of your creditors from continuing with any collection actions, including repossessions or foreclosures.
Once you file, you or your attorney should immediately notify your lender so it stops all collection actions (the court will notify your lender of the bankruptcy, but it might take a few days or more).
The automatic stay is not absolute. Your car lender can ask the bankruptcy court to “lift” (remove) the stay as to the car loan. If you are behind in your car payments and don’t have a lot of equity in the car, the court will likely lift the stay. If that happens, the lender can continue with collection actions against you, including repossession of your vehicle.
Even though Chapter 7 bankruptcy will wipe out your car loan, it doesn’t have a mechanism for repaying overdue car payments. So filing for Chapter 7 bankruptcy alone won’t help prevent an eventual repossession of the car if you don’t make arrangements to pay. Here’s why.
When a lender agrees to make a car loan, it takes steps to ensure that the loan will get repaid by requiring you to put the car up as collateral for the loan. Collateralizing the loan creates a secured debt.
A secured debt has two parts: (1) a contract that spells out your responsibility to pay back the loan; and (2) a document that gives the lender an ownership (security) interest in the car until you pay off the balance. The second legal instrument creates a lien. Because the lender has a lien attached to your car, if you fail to pay the loan, the lender can enforce the lien by repossessing your car.
If you want to keep the car, the first thing that you must do is determine whether you have any equity in the car, and if so, whether you can protect (exempt) it in bankruptcy. Most states allow you to protect the property that you’ll need to maintain a household and job, including some equity in a vehicle.
You’ll want to take a look at your state’s exemption statutes and see whether the exemption amount will cover the equity—otherwise, you probably won’t be able to keep it. The bankruptcy trustee appointed to your case will sell the car for the benefit of your creditors.
(To learn more, see The Motor Vehicle Exemption: Can You Keep Your Car in Chapter 7 Bankruptcy?)
Although it isn’t easy to keep a car in Chapter 7 bankruptcy when you’re behind on the payments, you have options. Here are a few:
An option that that isn’t used much is redemption. It allows the filer to pay the lender the replacement value of the property. This can work well if the property is worth less than what the debtor currently owes. There are some restrictions, however:
Although this can be an excellent way to go, most bankruptcy filers don’t have sufficient cash to cover the replacement value of the property. However, some lenders will redemption loans. If you’re interested, talk with a local bankruptcy attorney.
(You can find out more by reading Redeeming Secured Property in Chapter 7 Bankruptcy.)
]]>