A major concern for people who file bankruptcy is whether they will lose their possessions, especially their car. In many cases, your motor vehicle exemption will allow you to protect the equity in your car, which will keep a Chapter 7 trustee from taking it. You need to know the value of your car, how much you owe on and the amount of your exemption to figure out if you are at risk of losing your car. In a Chapter 13, you are not at risk of losing your car, unless you can’t afford to keep it.
How Much Is Your Car Worth?
Most courts use a book value, either NADA or Kelly Blue Book, as the starting point for valuing your car. You can obtain this information for free using the website for either company. You will need to know the year, make and model of your car, the mileage, and the condition. You are trying to figure out how much you could sell the car for considering its age and condition. Make sure any condition issues are taken into account when you are entering the information into the website.
How Much Do You Owe On Your Car?
If you have a car loan, the amount that you owe on the loan gets deducted from the value of your car to calculate the equity. You will have to list the amount of the secured claim against your vehicle in your bankruptcy papers; this is the amount you owe. You can usually find this amount on your most recent statement.
How Much Is Your Exemption?
Federal and state law both allow a debtor to protect certain property from creditors that the state has decided is necessary to continue working and maintaining a reasonable standard of living. The property that can be protected is called exempt property. The value of the property that can be protected is called the exemption. Some states use federal exemptions; some states require you to use state exemptions. Check your state exemption laws to find out which to use. Find the amount of your exemption, and then you can decide if your car is at risk of being taken by the trustee.
Do the Math
Take the value of your vehicle, minus the amount you owe on your car loan; this is the equity in your car. (If you don’t have a car loan, the equity is the value of the car.) Compare the equity to the amount of your motor vehicle exemption. In Chapter 7, if the exemption amount is more than the equity, you can keep the car. If the exemption amount is less than the equity (non-exempt equity), the Chapter 7 trustee has the right to take the car, sell it and pay the non-exempt equity to your creditors.
As a practical matter, there needs to be enough non-exempt equity in the car to make it worthwhile for a Chapter 7 trustee to sell it before they will do so. A trustee will have expenses associated with selling the car, they have to pay off any car loan, and cover their fees and costs. If the non-exempt equity is minimal, a trustee usually won’t sell the car.
Other Options to Protect Your Car
Some states have a wildcard exemption that allows you to exempt any property. This wildcard exemption can be added on to the motor vehicle exemption to help cover any non-exempt equity.
Additionally, a Chapter 7 trustee will often allow the debtor to purchase non-exempt equity from the trustee so the debtor can keep the car. Basically, you pay the trustee the amount of the non-exempt equity, instead of the trustee selling the car to get it. Sometimes, you can get a discounted amount since the trustee will not have to go through the hassle of actually selling the car.
Cars With Loans
If you have a car loan, you will still need to make arrangements with your lender to keep the car, even if the trustee is not taking it. In Chapter 7, you will need to either reaffirm (promise to keep paying) or redeem (pay the value of the car in a lump sum). If you are behind on your payments when you file, you may have a hard time getting the lender to reaffirm, unless you can bring the payments current. If you have a car loan, it is a good idea to consult a competent bankruptcy attorney to decide your best option.
Cars in Chapter 13
Chapter 13 trustees do not take assets and sell them. Instead, the equity in your assets is used to help calculate how much unsecured creditors have to be paid. You would go through the same steps outlined above to value your car and take any possible exemptions. If you have non-exempt equity in your car, the amount of the equity is added into the amount that has to be paid to unsecured creditors.
If you have a loan on your car, it will be paid as part of your Chapter 13 plan. If you bought the car less than 2 ½ years ago, you will have to pay the full amount that you owe, though you can probably lower your interest rate. If you bought the car more than 2 ½ years ago, you can usually pay the value of the vehicle in full with interest, and any additional amount is paid with other unsecured creditors. This can save you a significant amount of money. You can also decide that you don’t want to keep the car, or can’t afford to pay for it, and give it back to the lender. The lender will sell it and apply the sale proceeds to the car; then what is leftover is paid through your plan.