Can I keep two cars in Chapter 7 bankruptcy?

If you have two cars and you file Chapter 7 bankruptcy, you may or may not be able to keep both vehicles. Whether you can do so will depend on whether the cars are paid off, and if they're not, the amount of your car payments and why you need the vehicles.

Are Both Your Cars Paid Off?

If both your cars are paid for and there are no liens on them, you can keep them both if you can exempt the equity in both. Federal bankruptcy law and most states exempt a certain amount of value in cars and other vehicles. If all of your equity is exempt, you can keep the car. You may also be able to protect one or more cars by using a wildcard exemption.

If you are unable to exempt the full value of either vehicle, you might be required to turn one or both cars over to the trustee. The trustee will sell the car, pay you your exempt amount, and use the rest to repay your unsecured creditors. If you pay the nonexempt value to the trustee, you can keep the car. (To learn how car exemptions work, and to find the motor vehicle exemption amount for your state, see The Motor Vehicle Exemption.)

Example. Anne owns two cars, which she paid off long ago. One car is presently worth $2,000 and the other is worth $3,000. She is able to exempt all the value in the $2,000 car, but she can only exempt half of the $4,000 car. To keep the $4,000 car, she must pay the trustee $2,000.

Do You Still Owe Money on One or Both Cars?

If you owe money on one car but not the other, or if you owe money on both cars, whether you can keep them both becomes more complicated. To keep a car in Chapter 7 bankruptcy that is subject to a loan, you have to repay the loan. You can do this either by reaffirming the debt (agreeing to repay it according to your original repayment schedule) or redeeming the vehicle (offering the value of the vehicle in one lump sum).

Redemption is uncommon; most Chapter 7 debtors do not have the money available to pay the full value of their vehicles. More common is reaffirmation, which requires you to continue making your regular monthly payments. To reaffirm a debt, you must show that the doing so is necessary and that the payment is reasonable and will not cause you undue hardship. In other words, you will need to show the court that you need two cars and that the payments are not only affordable, but also reasonable under the circumstances.

If you owe money on either or both cars and your equity is substantial, you may also have to deal with the trustee. While it is rare for a trustee to take and sell a car with a lien, trustees will do so if the value of the car beyond the car loan balance and the exemption will provide a meaningful dividend to the estate. If you do have equity in your car despite your outstanding loan, you might have to pay the trustee the amount of that equity in addition to reaffirming the debt if you want to keep the car.

For more on your options for dealing with car debt in Chapter 7 bankruptcy, so Nolo's section on Your Car in Chapter 7.

Example 1. Mary and Bill are a married couple. Bill files Chapter 7 alone. Bill has two car loans in his name - one for his car and one for the car Mary drives. The car payment on Bill's car is $300; the car payment on Mary's car is $250. Both Bill and Mary work, and they need separate transportation. They are able to afford their car payments without sacrificing their other reasonable and necessary expenses, such as food and rent, because they will no longer be sending their children to private school. Bill will likely be able to keep both cars, because the expense is reasonable and necessary without presenting an undue hardship.

Example 2. Joe is single and files Chapter 7 bankruptcy. He has two car payments - one for his sedan, which he uses to drive to work, and one for his sports car, which he bought to fix up. The court will likely find that Joe can keep his sedan and not his sports car, because the sports car payment is not a necessary expense.

Example 3. Tom has a sports car worth $15,000 and a run-down sedan worth $2,000. Tom owes $6,000 on the sports car, leaving $9,000 in equity; the sedan is paid for. Tom has $4,000 of exemptions available. He uses $2,000 to exempt the sedan and $2,000 to exempt some equity in the sports car, leaving $7,000 in equity. To keep the sports car, Tom will have to reaffirm the $6,000 debt and pay $7,000 to the trustee.

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